11 investing terms everyone should know

Getting started with investing is pretty exciting — but with all the terms that get thrown around, it can also start to feel like you’re learning a foreign language. So how about a little vocab lesson? We’ve rounded up 11 of the most common and important investing terms everyone should have in their lexicon. Let’s dive into investing lingo 101.

Appreciation. Where investments are concerned, appreciation is when you see the value of an asset increase over time. For example, if your $1,000 stock investment increases in price to $1,200, you can say that your investment has appreciated by $200 (nice!).

Asset allocation. Asset allocation refers to the mix of stock and bonds in your portfolio. That mix of assets is a reflection of how aggressive or conservative you want to be in your investment strategy — i.e., if you want to be more aggressive, you’ll likely have more stocks than bonds in your portfolio.

Bond. A bond is essentially a loan given to a company or government by investors. So, when you buy a bond, you are generally agreeing to lend money to a government or a company. Typically, the bond issuer promises to repay the entire principal loan amount on a future day, known as the maturity date, and pay interest in the meantime.

You’re probably familiar with a few of the most common types of bonds: government bonds, such as Treasury bonds and tax-free municipal bonds, which are often used to fund government operations and capital projects; corporate bonds, which help companies fund their operations and invest in themselves; and savings bonds, such as the Series I or Series EE savings bond.

What we’re talking about here are investment-grade bonds. They range from AAA-rated bonds, the highest grade, to junk bonds on the other end of the investment bond spectrum. Investing in bond funds is a great alternative to purchasing individually.

Depreciation. This is an easy one: It’s the opposite of appreciation, and means your asset is losing value over time. A car is a prime example of a depreciating asset, due to increasing miles and the wear and tear over time.

Diversification. This is the process of spreading out your money across a number of different investments in order to manage risk. Rather than investing all your money in one stock or one company, you can manage your risk by investing across different investment options. When you select a packaged investment option, or portfolio, different investments have been carefully selected across a range of industries, sizes of companies, and countries to maximize the portfolio’s diversification.

Mutual fund. A mutual fund is a mixture of stocks and/or bonds purchased with money pooled from individual investors — sort of like going in with your friends to get a better deal on a big-ticket item, like a vacation home. It’s managed by a professional portfolio manager who stays abreast of what the securities are doing (kind of like hiring a property manager to keep things in good working order in that shared vacation home). Fees usually depend on how actively the account is managed, among other things.

Risk tolerance. This is the ability to withstand the possibility of losses when things get rocky in order to achieve a possibly larger payoff. Knowing your risk tolerance helps create a game plan. If your tolerance is low, you’ll want to invest conservatively; for instance, a greater portion of your portfolio might be in low-risk bonds and a smaller portion in higher-risk stocks.

Stock. This type of investment might be referred to as equity or shares, and represents a fraction of ownership in a company/corporation. This entitles the owner of the stock to a portion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called shares.

Taxable accounts. A taxable account can be used for investing in assets like stocks, bonds, and mutual funds in order to achieve your financial goals. As your investments grow in value each year, you’ll owe taxes on any dividends you get, and you may also owe taxes on any gains you have from the original purchase price.

Target date. This is the finish line for your investments — the day you’re planning on cashing out or using your funds. It could be the day you want to close on your new home, or it could be your actual retirement date. Target date funds are designed to help manage investment risk. Here’s how it works: You pick a fund with a target year that is closest to the year you anticipate needing your funds. As you move toward your “target date,” the fund gradually reduces risk by changing the investments within the fund.

Volatility. A volatile market is unstable, moody, and fluctuating. The term is often used to describe up-and-down fluctuations in the market. The more frequently the market swings up and down, the more volatile it is said to be — meaning the value of your investments could swing, too. That’s why it’s so important to invest according to your risk tolerance.

In summary, you don't have to know everything to start investing. But with some basic terms in your investment vocabulary, you won’t feel like you’re missing something you should know. Don't worry, we’ll be there to help you every step of the way.