65 Must Know Investment Terms And Definitions For Beginners

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If you want to wait till you know everything about investing, you’ll probably never start.

There is so much to know and learn. And it can be overwhelming for beginners and seasoned investors alike.

Here is a list of basic investment terms you’re likely to come across in posts, articles or books about investing when you’re just starting out.

A – B

Active Management: an investment strategy where portfolio managers seek to outperform the broader market by making specific decisions to achieve an objective. It relies on research and analysis, expert judgment, and market forecasts to decide on whether to buy, sell or hold an investment.

Because of the frequent trading in the portfolio, an actively managed fund will have higher fees than a comparable passively managed funds.

Adjusted Cost base (ACB): used to determine the cost of an investment for tax purposes. It is based on the original investment cost plus any fees or commission paid to acquire it, additional purchases, reinvested amounts and so on.

Alpha: measures how an investment has performed compared to an underlying market index or benchmark. That is, it is the excess return earned relative to the benchmark index.

It can be used to measure a fund or investment manager’s performance or skills.

Annual Return: the return, profit or loss, earned on an investment over a one-year period.

Appreciation: is simply an increase or rise in the value/price of an asset over time.

Asset Allocation: refers to the process of allocating your investments to different asset classes, such as bonds, stocks, real estate and so on.

It aims to strike a balance between risk and reward, and allocates different percentages to various asset classes depending on the investor’s risk appetite.

Related Post: What Is Asset Allocation And Why Is It Important In Investing?

Asset Allocation Fund: Also known as Asset allocation ETFs or All-in-one ETFs. It is a fund that offers investors a one-stop, diversified investment in various asset classes, with varying allocation, depending on their risk tolerance.

It could be a mutual fund or ETF. For example, Vanguard Conservative ETF Portfolio (VCNS) is an asset allocation ETF with 60% and 40% allocation to fixed income and equity respectively.

Learn more about Asset Allocation ETFs through this guide.

Asset Class: a group of assets or securities that have similar features or characteristics. Some common asset classes include stocks or equities, bonds, cash equivalents and so on.

Back-end Load: a fee paid by investors when they sell their mutual fund shares. It is also called a deferred sales charge. They are designed to discourage early redemptions.

Usually, the percentage will reduce for each year the investor stays invested and may go down to 0% after some years.

Balanced Fund: are funds that have both equity and fixed income (bonds and even cash equivalent) components. They try to achieve both income and growth objectives in a single portfolio.

Read More: VGRO Review: Vanguard Growth ETF Portfolio

Bear Market: refers to a period of prolonged drop in prices of assets in the stock market, typically a drop of 20% or more.

It is usually a period of widespread pessimism about the economy, negative investor sentiments, increasing unemployment and so.

It is the opposite of a bull market, where there is a general rise in stock prices.

Bid Price: the highest price a buyer is willing to pay for a security or stock.

Bid-Ask Spread: the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept for an asset.

For very liquid assets, the spread will be small and immaterial, usually just a few pennies. However, it could be large for thinly traded securities.

For illiquid stocks, it’s best to use a limit order and not a market order when trading to be sure you’re going to get your desired price or better.

Blue Chip Stocks: a high-quality and well-established investment, with a relatively low investment risk. These are companies that have performed well and usually shown the ability to consistently pay dividends over time.

Bonds: are a type of loan issued by a corporation or government that pays the bondholders (investors) a fixed rate of return over the life of the investment.

The bond issuer agrees to pay back the loan at a future date (maturity date), with periodic interest at specified periods.

Depending on the rating, bonds are generally less risky and less volatile compared to stocks.

Book Value: can mean two different things. It can be the acquisition value or the value of an asset on the day it is purchased.

It can also mean the net assets of a company, that is what is left after deducting its liabilities from the assets. It is often used to determine if a company is under-valued

Broker: an institution or individual that executes a buy or sell order on behalf of investors. They serve as middlemen between the buyers and sellers.

The investor will typically be required to pay a fee but there has been a trend towards zero-cost brokerage fees.

Bull Market: a market where there’s an upward trend in prices of stocks. It is characterized by a positive market sentiment and a general bullishness by investors.

Buy and Hold: an investment strategy that buys and holds an investment for a long-term, irrespective of what is happening in the market. It is a more disciplined approach to investment that avoids constant tinkering with a portfolio.

C – G

Canadian Investor Protection Fund: CIPF is to investment firms, what CDIC is to deposit-taking institutions. It covers accounts up to $1 million in the event that an individual investment firm goes bankrupt.

Capital Gain or Loss: Capital gain occurs when an asset is sold for more than the initial price an investor paid for it. If the sale price is lower than the original purchase price, there is a capital loss.

Capitalization: the market value of a public traded company. It is calculated by multiplying the number of outstanding shares by the market price per share.

Common Share: a security that represents units of ownership interest in a company. In general, common shareholders can vote to appoint the board of directors and auditors, and qualifies for a share of any profit distributed by the company as dividends, after the bondholders and preferred shareholders have been paid.

Day Trading: refers to speculative trading in securities, where the traders hope to take advantage of intraday price movements. They buy and sell the securities and close them out by the end of the day.

Discount Brokerage: a type of brokerage that allows buying and selling of securities at a reduced cost than a full-service brokerage. They usually only execute orders and provide no investment advice.

Diversification: the process of spreading out investments various securities, asset classes and sectors in order to reduce the effects of volatility and potentially increase returns.

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Dividends: a distribution paid to a company’s common and preferred shareholders out of his profit. While companies may choose not to pay dividends, it is an incentive for investors to buy and hold the stocks on a long-term basis. Dividend-paying stocks are also more attractive for income seeking investors like those in retirement.

Dollar Cost averaging: the practice of investing, usually, the same amount of money at regular intervals over a long period, rather than a single lump sum. The investor will buy stocks when its price is high and when it is low, and average out over time.

It is a good approach for investors in the accumulation stage, where they invest a set amount periodically from their salaries.

Equity: refers to shares and represents a ownership interest in a company.

Exchange Traded Funds (ETFs): are funds that track a specific market index, sector or commodities by holding a basket of stocks, bonds or other securities. They traded on an exchange like normal stocks. They are usually low-cost and offer an easy and quick way to build a diversified portfolio.

Expense Ratio: represents the annual fee that the fund charges to its shareholders as a percentage of net assets. It is the cost incurred by the fund manager to manage the shareholders’ fund. It includes management fees, administrative fees, distributions fees and so on.

Fundamental Analysis: the analysis of a security by evaluating the company’s sales, revenue, expenses, profit and other factors. It contrasts with technical analysis that looks at price movement

Good Till Cancelled Order (GTC): a buy or sell order that remains in effect until it is executed or cancelled by the investor. Some brokerage may have a time limit for when such orders may remain active.

Guaranteed Investment Certificates (GICs): are safe and secure investments sold by financial institutions and pays a fixed or variable rate of interest for a set period. Terms could be as short as 90days and up to 5 years or more. They are protected by the federal or provincial deposit insurer, depending on the issuer.

Related Post: Understanding Guaranteed Investment Certificates (GICs) in Canada

I – P

Index: a measure of how a stock market, or a subset of it, is performing. It is a quick way of gauging the prices of companies in the index and how they have performed over time.

S&P/TSX is an example of an index – it tracks the performance of companies listed on the Toronto Stock Exchange (TSX). S&P 500 is another index that tracks the performance of 500 of the largest U.S. companies.

Index Fund: a type of fund that is set up to achieve roughly the same return as a market index, such as the S&P/TSX, by investing in all the securities that are included in the index.

Limit Order: an order to execute a trade at a specific price or better. For buy limit order, the trade will only be executed at the limit price quoted by the investor or at a lower price. Sell limit orders will be executed at the limit price or higher.

Long-term Investment strategy: a strategy that buys an investment and holds them for the long term, without worrying about the day-to-day or short-term fluctuation in prices.

Managed Account: an investment account owned by an investor but managed by a professional portfolio or investment manager. Investors simply move funds to the account, and it is invested on their behalf according to their risk appetite or investment goals.

The investment manager will charge a fee for the service. It contrasts to a self-directed account where the investor does all the research, makes the investing decisions, and executes the trades.

Margin Account: an investment account at a brokerage firm that allows investors to trade securities on credit, that is using borrowed funds.

Market Order: a type of order placed by an investor to buy or sell a stock, or other securities, at the current market price.

Market Timing: refers to the practice of timing the entry and exit of a security position based on expectations of how the market will perform in the future. With this strategy, an investor is hoping to buy an asset when it is low and sell when high.

Non-Registered Investment Account: refers to taxable investment accounts with no tax-sheltering advantage. Unlike registered accounts like TFSA, RRSP and so on, non-registered accounts have no contribution limits.

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Option: the right, but not the obligation, to buy or sell a specified amount of security, at a specified price within a specified time frame. A put option is the right to sell, while a call option is the right to buy a security.

Passive Management: an investment strategy that seeks to maximize returns by minimizing buying and selling or active trading of its holdings. The portfolio manager simply buys and holds the stock for long-term and is not concerned about short-term market volatilities.

Payout Ratio: the percentage of a company’s earnings paid to shareholders as dividends. It can be used to determine how sustainable a company’s dividend payment is.

Portfolio: a collection of investments like stocks, bonds and other asset types that is owned by one person or organization and managed collectively.

Profit-taking: refers to the practice of selling an asset, after it has risen significantly in price, to lock in the profit.

R – Z

Real Return: refers to the rate of return on an investment after inflation has been accounted for. For example if an investment had a return of 7% over a year but inflation was 2%, then the real return is 5%.

Rebalancing: the practice of bringing a portfolio back to its original asset allocation. It usually involves selling one or more assets in a portfolio and buying other assets to realign the portfolio to the intended allocation.

Check this rebalancing guide to learn how it works.

Registered Education Savings Plan (RESP): a tax-sheltered investment account that lets parents save for the children’ post-secondary education in Canada.

Learn more about RESP though the posts below.

Registered Investment Account: are investment accounts with tax-sheltering advantages. In Canada, examples include RESP, TFSA and RRSP.

Registered Retirement Income Fund (RRIF): a registered account that allows you to shelter growth from taxes during retirement. At age 71, RRSPs are converted to RRIF and minimum annual withdrawals will be required.

Risk Tolerance: refers to the degree of volatility of an investment that an investor is willing to accept. It is considered when determining the right asset allocation for an investor. An investor with a low risk tolerance will want to allocate a higher proportion to safer assets like bonds.

Robo-advisor: Robo-advisors are digital investing platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. They create and manage portfolios for their customers based on each customers’ unique goals, time horizon and risk tolerance.

Secondary Market: a market where securities that are already in circulation are bought and sold. Most trading activities are done in the secondary market.

Self-directed account: a type of investment account at a brokerage in which you are in complete control of your investment portfolio. You make all the decisions relating to the research of new securities, buying and selling, how much and when to invest and so on.

Short Position: a trading technique in which an investor borrows a security and then sells it with plans to repurchase it at a lower price. Investors take a short position when they expect an investment to fall.

Stock: also called shares, refers to a security that represents an ownership in a company.

Stock Market: refers to the organized trading of stocks through exchanges, over-the-counter, and other computerized trading marketplaces by investors.

Tax-Free Savings Account (TFSA): a tax-advantaged investment account for Canadians that allows them to save and invest with all the growth completely tax-free. Unlike the RRSP, contributions are not tax-deductible, but withdrawals are tax-free anytime.

Related Post: Beginner’s Guide to TFSA (How To Start Investing With TFSA)

Time Horizon: the amount of time an investment is expected to be held before it will be liquidated by an investor for a financial goal.

Total Returns: refers to the total income earned, dividends plus capital gains, from an investment over a given period, usually over a year.

Value Investing: an investment strategy where investors purchase securities that they believe are selling below their intrinsic or true value.

Yield: the ratio of the annual cash received as dividends from a stock and its current market price.

Final Thoughts on Investing Terms

The glossary of investing terms above is a good starting point for rookies. You will pick up more as you continue to learn and improve your investing knowledge.

Click the link below for 85+ additional investment terms for more seasoned investors.

85+ Investing Terms And Definitions For Experienced Investors

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Simon is a CPA by day and a Personal Finance Blogger by night. With over a decade experience in financial services, he's passionate about personal finance, investing and helping people take control of their financial life.

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