As a beginner, there are tips that you can get from different sources about investing, or long term investment strategies, and of course, if you understand them all, it should not be difficult for you to start your journey.
However, there’s no denying that no matter how good and useful the tips are, if you don’t understand a word in it, it’s as good as an extinct dodo bird. It will also hinder you to remember the tips you need when picking stocks.
In this article, we have compiled some of the most common terms and phrases that you will, definitely more than once, encounter as you dive deeper in the investing jungle. You can think of this as your handy dictionary, where you can find the definitions you are looking for. Read on!
Types of Investments
If you own this kind of stock, you practically own a part of a corporation. Most companies have a single stock class that stands for the entire equity ownership.
However, some companies sport multiple classes of stock, and they may include dual classes of stock. To give you a more vivid picture of this stock class, imagine it as a stock that, once you own it, gives you more (or less) voting rights than another class of stock.
When you own a common stock, you are entitled to a proportionate share of the company’s earnings, which may be distributed as cash dividends sometimes. You must also remember the phrase “blue chip stocks,” since this refers to the best of the best of stocks.
This is sort of a fusion of different kinds of stocks. It can behave somehow like a stock, and it can also behave somewhat like a bond, while technically is equity.
Normally, preferred stocks are issued at par value (for instance, $2000 per share), and it also scores a fixed coupon (for instance, 10 percent). If you own this kind of stock, you will receive $100 per year until the preferred stock is redeemed, which then makes it highly sensitive to interest rates.
There are also different types of preferred stocks, like convertible preferred stocks.
Bonds represent a sort of a loan. Basically, it is the money loaned to the bond issuer.
In simple terms, the bond issuer promises to repay the entire loan amount on a predetermined day. The scheduled date is also called the “maturity date,” and then the bond issuer will pay interest income in the meantime based upon a coupon rate.
Just like preferred and common stocks, there are also a number of different bonds. There are sovereign bonds that are issued by the governments, like Treasury bonds, tax-free municipal bonds, and corporate bonds. There are also savings bonds, like the Series EE savings bond and the Series I savings bond. There is also James Bond.
Real estate is simply a property you can hold, like land or buildings. You can use them or you can let other people pay for its use. In other words, you can let them rent it.
Types of Investment Structures
A mutual fund is basically a pooled portfolio. You buy some shares or units in a trust, and then a professional portfolio manager will invest the money.
The fund holds individual stocks if it’s equity funds, or bonds, if it’s bond funds, with you receiving an annual report every year.
The reports will give you the details of you owned investments, the income you generated, your capital gains, and plenty more.
Mutual funds do not trade all day because it tries to prevent people from taking advantage of the underlying change in net asset value.
What they do is collect buy-and-sell orders all day, and once the markets close, they will be executed according to the final calculated value for that trading day.
Exchange Traded Funds
ETFs are practically mutual funds that trade all day on stock exchanges, like stocks. Consequently, you can pay more or less than the value of the underlying holdings in the fund.
You can choose ETFs, or you can use traditionally structured mutual funds. It’s up to your preference since some ETFs have tax advantages and some do not. Remember that most of their advantages over traditional mutual funds are mostly due to marketing rather than substance.
Index funds do not sport any distinctive or special characteristic. It is instead an ordinary mutual fund, and sometimes it trades as an ETF. It allows the index designer effectively manage the fund via the controlling of the methodology which the fund portfolio manager uses to buy and sell investments.
Index funds offer you much lower expenses than non-index funds because it relies on other investor’s decisions. That effectively gives it the crown as the best choice for you if you are a small investor.
Hedge funds are private entities.
It’s usually a limited partnership, but it was more commonly a limited liability company that invested money from its limited partners or members following a certain plan.
Most of the time, the hedge fund charges 2 percent annual fee, with an additional 20 percent of the profits over a hurdle rate, and with some changes that ought to protect investors.
Investing in hedge funds can be quite a challenge for most ordinary investors due to the regulations that the government implemented to protect new and inexperienced investors.
This one is quite distinctive, since it is a special type of entity that provides immense asset protection benefits. If you’re quite lucky, it may even include tax benefits, but only if it’s wisely structured.
These are the assets that trust funds can hold: stocks, bonds, real estate, mutual funds, hedge funds, art, and farms.
However, trust fund tax rates are compressed on income, so it isn’t distributed to the beneficiary, preventing huge accumulations of capital. In other words, the Federal, state, and local governments will get bigger bites from it.
If you prefer, you can also choose to buy real estate via real estate investment trusts, or REITs.
REITs trade like stocks and they have some sort of a special tax treatment. Plus, there are a myriad of REITs specializing in all different types of real estate.
Master Limited Partnerships
MLPs are limited partnerships, and they can trade as if they were stocks. They brandish unique tax treatments and there are complex rules that surround them, and this should give you a warning, if you are a beginner, that it’s better to put this at the end of your list if you’re not yet very familiar with it and how it works.
There are many other terms that you should know and learn if you are really eager to become a great investor. Each of these terms covers a lot of ground, and different articles are written about them. Learn them now, and learn them quickly!
Lastly, you can check out the second part too!
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