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Investing terms & concepts you should know

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If you think you’re the only one who is not investing your money, think again. There are so many reasons you may be reluctant to invest—everything from worrying you don’t have enough to invest or that you might lose your money if you do.

Could it be that financial concepts can be confusing and the jargon used to explain them intimidating? Take a few minutes now to learn the basics of investing so you are better equipped to make decisions that are right for you.

Begin by outlining your investment goals

Before you make investment decisions, consider how you are hoping to use the money, and when you may need it.

Let’s say you plan to save for your kid’s college education. How you invest your money can depend on whether your child is a toddler or a tween. Your plans for the money will have an impact on how you invest it. Plus, it will help you narrow down investment choices.

Setting a goal can give shape to your plans and make it easier to hold yourself accountable.

Investing is generally considered a long-term venture. If you think you will need the money soon for planned or unplanned expenses, consider an emergency savings account.

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Understanding investing jargon

Gain the confidence you need to invest by learning a few basic terms. The more you know, the easier it can be to make sense of investing jargon.

What is the difference between stocks, bonds and mutual funds?

The stock market is a term used to describe the place where publicly-held companies buy, sell and issue shares of their company. Publicly traded companies use the market to raise money to grow and expand their operations by issuing stocks or bonds.

A stock is a security that represents a share of ownership in a company

Each share of stock represents a small piece of ownership of a company, bought and sold on the market. The stock price reflects the value of the company, but it is determined by what investors are willing to pay. Generally, stocks are riskier investments than bonds.

A bond is a loan from an investor to a borrower—like a company or government

When companies issue bonds, they are basically borrowing money from investors to fund their growth. When you buy a bond from a company or government, it will pay you back, plus interest.

A mutual fund is a collection of stocks and bonds selected for an investment strategy

A mutual fund is a type of investment consisting of a combination of stocks, bonds and other assets that is managed by professional money managers. Mutual funds give individual investors like you access to a diversified mix of stocks and bonds you may not be able to invest in otherwise.

Read more: The differences between real estate, stocks, bonds and mutual funds

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What are the three asset classes?

The three main asset classes are stocks, fixed income (or bonds) and cash. Another asset class you may hear about is alternative assets, which refers to tangible assets like real estate, gold and oil. An asset class is simply a grouping of investments with similar characteristics.

You may be most familiar with the cash asset class. You use it to buy goods and pay for services, and it’s what you own in traditional bank and savings accounts. Cash offers a lower return on investment in exchange for its safety and guarantees.

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How are asset allocation and diversification different?

Asset allocation and diversification are both investment strategies, but the key difference is that asset allocation is the percentage of stocks, bonds and cash you invest in while diversification is about spreading your investments among the asset classes.

Asset allocation spreads your money through various investments

Asset allocation is a strategy to help you minimize your overall investment risk and increase the potential for gains by spreading your money across various types of investments, or asset classes, such as stocks, bonds or cash.

Diversification allocates your investments within the same asset class

Diversification is an approach that helps spread your risk even further by allocating your investments within the same asset class. The idea is that if one of your investments is doing poorly, perhaps others that you own will make up for any losses.

An example of diversification would be investing in a variety of stocks from several different small companies instead of allocating your entire stock investment to one small company.

While asset allocation and diversification can help reduce market risk, they do not eliminate it. Diversification does not assure a profit or protect against loss in a declining market. That’s why many investors choose to work with a financial advisor they trust who can guide them to make better decisions with considerations based on their investment goals, time horizon and risk tolerance.

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What is dollar cost averaging?

Dollar cost averaging is systematic investing of equal amounts at regular intervals, whether the market is up or down. Think about it as starting small and being consistent over time. Dollar cost averaging is a tried-and-true method for investing that helps reduce the impact that normal volatility can have on your investments.

How does dollar cost averaging work?

With dollar cost averaging, you buy more shares when the prices are lower and fewer shares when prices are higher, resulting in a lower average cost per share. The goal is to reduce the impact of normal market volatility on the investment.

Dollar cost averaging doesn’t guarantee you’ll make a profit or prevent a loss, but it can help you remove some of the guesswork out of your investing decisions. It might also reduce the stress you may feel about investing.

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What does risk tolerance mean?

Risk tolerance measures an investor’s ability to accept that investment values will fluctuate for a variety of reasons. Investors are generally aggressive, moderate or conservative.

A general rule of thumb is that the younger you are, the more aggressive you can be with your investment decisions because your investments will have longer to recover from the fluctuations of the market.

But that’s only if you can handle the risk. And age isn’t necessarily a factor in your ability to stomach market volatility. If you know you might worry during normal volatility, factor that in when choosing investments.

Since risk is part of investing, it's important to understand your tolerance for it. The good news is that investments offer a spectrum of risk levels, which allows you to make choices that best match your ability to stomach the risk.

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Addressing common investing concerns

It may help you feel less intimidated about investing if you know that other people have the same questions that you do. Take a look and see answers that might inspire you to invest.

What if I don’t have enough money to invest?

Generally, you can invest with about $50 per month. Dollar cost averaging may make it possible to invest sooner because you’ll be investing with smaller amounts instead of having to save up a larger amount to invest at one time. It also can help reduce the risk that you’re investing at the market’s peak.

Am I starting to invest too late?

As long as you have goals, it’s never too late to start investing your money. And it’s never too early either. The secret is simply to be consistent.

See how much you are missing out on every day you don’t invest.

Are there hidden fees associated with investing?

Some investors want to spend hours poring over data themselves in search of hidden treasures. Others climb aboard the bandwagon of the latest investment fad. Those investors pay fees, and so will you.

Simply put, investing costs money. There are fees tied to transactions you make, advice you might pay for, and the products you buy. You will likely be taxed on any profits you make. Generally, the longer you hold your investments, the more time they have potential to grow, which can help offset the fees you will pay.

When learning about fees, a few terms you may hear are ‘expense ratio’ and ‘cost basis.’ They’re examples of how basic information can get lost in terminology—the words themselves can be intimidating. They’re also important to know since they refer to how you’ll be charged to own investments and how you could be taxed if your investment grows in value.

What is an expense ratio?

Fund companies charge an expense ratio to shareholders every year to cover administrative and operating expenses on their mutual funds.

What does cost basis mean?

Cost basis means the original value or purchase price of an investment for tax purposes. It’s something you need to think about if you’re selling your investment because you may be taxed on any gains.

Your financial advisor can help you understand the fees associated with investing and develop strategies to reduce them when possible.

What happens if I’m not happy with how my investments are performing over time?

Investing your money is not a set-it-and-forget-it strategy. There are risks, the markets do fluctuate, your goals may change. For all these reasons and more you may want to review your investments at least once a year to understand how the investments you have selected are performing. Your financial advisor can help you with rebalancing, which is one way to take the emotions out of investing decisions and restore the mix of investments back in line with your original plan.

How can I avoid market volatility?

Remember that successful investing takes time. You begin, track your results and gradually increase your commitment as you learn more. It’s important to get started and be consistent, always keeping in mind that there could be ups and downs along the way.

For example, if you want guarantees, you may sacrifice potential earnings. You could choose to defer taxes, or you might be focused on beating inflation. No matter which investments you pick, there will be trade-offs.

How can I avoid making emotional decisions?

When it comes to investing, one thing you do not want to be is emotional. If you get anxious or unsure when looking at your returns during market fluctuations, you might panic and sell off investments just before they start to bounce back.

That’s why it’s important that you think about time—not timing. If your investment strategy is based on long-term goals, you will be less tempted to focus on short-term fluctuations. Markets may dip, but historically, they have rebounded.

Of course, choosing not to invest is a choice too. Ask yourself: Will you be satisfied in 20 or 30 years if you do nothing about investing now? You’ll avoid fees, inflation, growth and market downturns that way, but you also may jeopardize your ability to achieve your financial goals.

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Get help from a professional

Use our easy Investment Style Quiz to help you gauge your ability to stomach the risks of investing and think about your goals for your money.

Where investing is concerned, you don’t need to be an expert. And there’s no need to venture into it alone. Your financial advisor can guide you along the way.

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