[{"@context":"https:\/\/schema.org\/","@type":"Article","@id":"https:\/\/moneydoneright.com\/passive-income\/stock-investing\/investment-terms\/#Article","mainEntityOfPage":"https:\/\/moneydoneright.com\/passive-income\/stock-investing\/investment-terms\/","headline":"7 Investing Terms You Should Know","name":"7 Investing Terms You Should Know","description":"If you look up the word \u201cjargon\u201d on Google, you\u2019ll find this definition: \u201cspecial...","datePublished":"2020-11-30","dateModified":"2021-09-29","author":{"@type":"Person","@id":"https:\/\/moneydoneright.com\/author\/logan-allec\/#Person","name":"Logan Allec, CPA","url":"https:\/\/moneydoneright.com\/author\/logan-allec\/","identifier":4,"image":{"@type":"ImageObject","@id":"https:\/\/secure.gravatar.com\/avatar\/6e74dd0453a5871d1dcfde6d40d9494765ca8bfdb01927cefee4564d4bee9075?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/6e74dd0453a5871d1dcfde6d40d9494765ca8bfdb01927cefee4564d4bee9075?s=96&d=mm&r=g","height":96,"width":96}},"publisher":{"@type":"Organization","name":"Money Done Right","logo":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/Money-Done-Right-Personal-Finance-and-Investing-Blog.png","width":488,"height":60}},"image":{"@type":"ImageObject","@id":"https:\/\/moneydoneright.com\/wp-content\/uploads\/investing-terms-you-should-know.jpg","url":"https:\/\/moneydoneright.com\/wp-content\/uploads\/investing-terms-you-should-know.jpg","height":460,"width":1900},"url":"https:\/\/moneydoneright.com\/passive-income\/stock-investing\/investment-terms\/","video":{"@context":"http:\/\/schema.org\/","@type":"VideoObject","@id":"https:\/\/www.youtube.com\/watch?v=H4Amo14ulGE#VideoObject","contentUrl":"https:\/\/www.youtube.com\/watch?v=H4Amo14ulGE","name":"7 Investment Terms You Should Know","description":"If you're new to investing, you might not know all of the terms that are involved in the world of stocks and investments. Investing can be confusing, and there are a lot of words and concepts that come along with investing.   So in this video, I'm going to go over seven basic terms you should know if you're investing or want to start investing.\n\nResources Mentioned:\n\u27a1\ufe0f Webull (Free Stocks): https:\/\/moneydoneright.com\/webull\/\n\u27a1\ufe0f My Video on Investing for Beginners: https:\/\/youtu.be\/oAd4Jfzjpq0\n\u27a1\ufe0f My Acorns Review: https:\/\/youtu.be\/B-yMVEjWn3A\n\n\ud83d\udcd6 Table of Contents:\n0:00 Investment Terms\n0:47 Term #1: Stock | What Is a Stock?\n2:43 Term #2: ETF | What Is an ETF?\n5:03 Term #3: Dividends | What Are Dividends?\n7:21 Term #4: Capital Gains | What Are Capital Gains?\n8:34 Term #5: Time Horizon | What Is a Time Horizon?\n11:03 Term #6: Margin | What Is Margin Trading?\n13:49 Term #7: Short Selling | What Is Short Selling?\n\n\ud83d\udc4d Other Investing Videos:\n- Investing for Beginners: https:\/\/youtu.be\/oAd4Jfzjpq0\n- 9 Worst Investments: https:\/\/youtu.be\/w1jd2JJkZ1I\n- Why I Don't Invest in Bonds: https:\/\/youtu.be\/o892ovQ43oo\n\n\ud83e\udd14 Do you think I covered the most basic investing terms? What terms did I miss? Let me know in the comments below!\n\n#investing #investor #stocks","thumbnailUrl":["https:\/\/i.ytimg.com\/vi\/H4Amo14ulGE\/default.jpg","https:\/\/i.ytimg.com\/vi\/H4Amo14ulGE\/mqdefault.jpg","https:\/\/i.ytimg.com\/vi\/H4Amo14ulGE\/hqdefault.jpg","https:\/\/i.ytimg.com\/vi\/H4Amo14ulGE\/sddefault.jpg","https:\/\/i.ytimg.com\/vi\/H4Amo14ulGE\/maxresdefault.jpg"],"uploadDate":"2021-01-02T22:30:00+00:00","duration":"PT18M17S","embedUrl":"https:\/\/www.youtube.com\/embed\/H4Amo14ulGE","publisher":{"@type":"Organization","@id":"https:\/\/www.youtube.com\/channel\/UCQ9WUXlSuLlbi5BLkgtEUEA#Organization","url":"https:\/\/www.youtube.com\/channel\/UCQ9WUXlSuLlbi5BLkgtEUEA","name":"Logan Allec","description":"Logan Allec is a CPA and the founder of Choice Tax Relief, which specializes in helping people with their IRS and state tax debt.","logo":{"url":"https:\/\/yt3.ggpht.com\/43_VKqrbO06RGMcxfdQbDXosrkVRq1yf5QgSQEiR4ILUGWV9fJtTh0o2ftYMYqVo6PwnEOPRdg=s800-c-k-c0x00ffffff-no-rj","width":800,"height":800,"@type":"ImageObject","@id":"https:\/\/www.youtube.com\/watch?v=H4Amo14ulGE#VideoObject_publisher_logo_ImageObject"}},"potentialAction":{"@type":"SeekToAction","@id":"https:\/\/www.youtube.com\/watch?v=H4Amo14ulGE#VideoObject_potentialAction","target":"https:\/\/www.youtube.com\/watch?v=H4Amo14ulGE&t={seek_to_second_number}","startOffset-input":"required name=seek_to_second_number"},"interactionStatistic":[[{"@type":"InteractionCounter","@id":"https:\/\/www.youtube.com\/watch?v=H4Amo14ulGE#VideoObject_interactionStatistic_WatchAction","interactionType":{"@type":"WatchAction"},"userInteractionCount":2991}],{"@type":"InteractionCounter","@id":"https:\/\/www.youtube.com\/watch?v=H4Amo14ulGE#VideoObject_interactionStatistic_LikeAction","interactionType":{"@type":"LikeAction"},"userInteractionCount":264}]},"about":["Stocks"],"wordCount":3425,"keywords":["schema"],"articleBody":"If you look up the word \u201cjargon\u201d on Google, you\u2019ll find this definition: \u201cspecial words or expressions that are used by a particular profession or group and are difficult for others to understand.\u201d Unfortunately, investing is full of these special words and expressions, which can make it unnecessarily difficult for new investors to get a feel for the terminology.Today, I\u2019m hopefully going to clear up some jargon for you as it relates to investing. I\u2019ve talked a little about investing in some of my recent videos and blog posts, and today I wanted to explain some of the terms that I\u2019ve been using. There\u2019s a lot of information to absorb, and I know that it can be really confusing when you\u2019re new to investing and you\u2019re hearing all these new words. So I think it will be really helpful to go over some of these basic concepts for new investors as well as those with more experience. So let\u2019s get into seven investing terms absolutely every investor needs to know.Table of ContentsToggle1. Stock2. ETF3. Dividends4. Capital Gains5. Time Horizon6. Margin7. Short Selling1. StockThe first word I want to bring up is stock. You\u2019re probably thinking that\u2019s an easy thing to define, but I think there\u2019s a lot of confusion about what stocks really are and what it means to buy and sell them.On a basic level, when you have stock in a company, what you really have is a piece of ownership of that company. So let\u2019s say you invest in Apple. Apple is a huge company, so if you buy one share you\u2019re actually purchasing something like a one in seventeen billion stake in Apple.Now a share that small isn\u2019t necessarily going to give you any power over the direction of Apple. So it\u2019s not like your investment means that you\u2019re going to be calling the shots or anything like that, and hopefully you aren\u2019t buying it in order to get involved in Apple boardroom meetings.As an investor, you\u2019re buying stock in Apple so that you can hopefully generate returns on that investment. And what that means is that if Apple stock grows by ten percent, your one in seventeen billion stake also grows by ten percent. So you\u2019re going to be a richer man or woman with a higher net worth even though you didn\u2019t do any actual work for Apple beyond buying the share.Of course, there\u2019s also a chance that your stock is going to lose value, there\u2019s always a chance that Androids get more popular or something else happens that cuts into Apple\u2019s value. When you invest in Apple, you\u2019re ultimately betting on them to be successful and increase their value in the long run.The point is that when you buy stock in a company, whether it\u2019s Apple or anything else, you\u2019re hoping that the company will become more valuable as a whole so that your little sliver of stock also becomes more valuable.\u00a0 And in a strict sense, you actually have control over that portion of the company. It\u2019s going to be a tiny amount of control in this case, but if you\u2019re an Apple shareholder then you\u2019re technically entitled to vote on certain types of decisions, at the shareholders\u2019 meeting for example. Unfortunately, you\u2019re going to be drowned out by the major investors, so again the investment is more to earn money than it is to gain any kind of meaningful control.2. ETFWe just got done talking about stocks in individual companies, but investing a lot of money in one or two companies isn\u2019t necessarily the best strategy.If you put your life savings in a single company, you might have the opportunity to generate incredible returns, maybe that company does really well and you gain fifty percent or something. But on the other hand, that company could also go out of business, and you could lose everything.Instead of exposing yourself to that kind of risk, in most cases it makes sense to diversify. And diversifying means that you spread your money around in a lot of different companies and a lot of different fields. For example, you probably don\u2019t want to only own stock in tech companies or in big pharma, because then you\u2019re tying your money to those specific industries.Now the idea of diversifying introduces a new problem, which is that you probably don\u2019t know enough about that many companies or that many industries. So if you\u2019re new to investing, and even if you\u2019re not, it can be really hard to build a diverse portfolio just by looking at individual stocks.This is where ETFs (exchange-traded funds) come in. An ETF is basically a fund that can be bought and sold like a stock, but it actually tracks the prices of hundreds or even thousands of different stocks.\u00a0 Instant diversification!For example, one index fund that I invest in is VOO. This is a really common Vanguard ETF, and it tracks the S&P 500 Index, which is just weighted amounts of 500 large companies that are traded on U.S. stock exchanges. So you don\u2019t have to buy shares in 500 different companies yourself, instead you can buy shares of the S&P 500. And from there, you\u2019ll get the same returns you would have had with individual shares in those 500 different companies.So that instant diversification is the main benefit of an ETF compared to an individual stock. If you\u2019re looking for a way to invest, consider downloading the Webull app. You can get two free stocks if you deposit $100 or more, so click here to take advantage of that offer.To be clear, an ETF doesn\u2019t have to be limited to stocks. You can find ETFs that track the prices of certain bond indexes, real estate, or precious metals like gold or silver.\u00a0 Believe it or not, my portfolio is mostly ETFs. And I cover more details in my video on investing for beginners, so make sure to check that out if you want to learn more about ETFs.3. DividendsAs I mentioned earlier, the primary goal of investing in a stock is usually to have that stock increase in value. But in some cases, that isn\u2019t the only way you can make money. Some companies actually pay their shareholders a portion of the company\u2019s income on a periodic basis, generally quarterly.McDonald’s is a really good example of a dividend stock. They paid a dividend of $1.25 per quarter for the first three quarters of 2020, and in December they\u2019re going to pay $1.29 for the last quarter.So if you held McDonald\u2019s stock all through the year, you would earn five dollars and four cents in dividend income. That will usually be deposited as cash into your brokerage account\/ Now you can also tell your brokerage to reinvest your dividends automatically, but that\u2019s a topic for a different day. Let\u2019s say you owned ten shares of McDonald\u2019s and you held them for the whole year, you would end up earning $50.40 in dividend income on top of any appreciation in the share price of McDonald\u2019s stock.Fortunately, dividends tend to be relatively predictable. McDonald\u2019s, for example, has been periodically bumping their dividends over the past few years. So the quarterly payment went up from $0.94 to $1.01 in 2017, then to $1.16 in 2018, then to $1.25 in 2019, and finally to $1.29 for the last dividend payment of 2020.With that being said, dividends are ultimately set by the board of directors. So other than the incentive to keep their shareholders interested, there\u2019s nothing stopping them from pulling those dividends if the market is down.On the other hand, the board can also increase the dividend on certain occasions. For example, Microsoft had some extra cash in the early 2000s, they wanted to give their investors more confidence, and they announced a one-time dividend of $3 per share in 2004. Again, the dividend is set by the board of directors, so there isn\u2019t anyone forcing Microsoft to pay out their extra cash. But in most cases, companies try to consistently increase the dividend or at least avoid reducing it so that they don\u2019t lose investors.4. Capital GainsIf you follow the news at all, you probably have heard the term \u201ccapital gains,\u201d specifically in the realm of taxation. But what are capital gains?This may sound redundant, but capital gains are gains you\u2019ve realized upon selling a capital asset. OK, your next question is probably \u201cwhat\u2019s a capital asset?\u201dNow, this isn\u2019t a very technical definition, but a capital asset can be almost anything that you buy that increases in value. When that thing, let\u2019s say your Apple stock, has increased in value, you can sell it for that increased value. So now you have a capital gain, and the gain is equal to the difference between the purchase price and the sale price. If you bought five shares for $500 and sold them for $600, then you gained $100. That $100 is your capital gain, and that is generally taxable.The reason why people talk about capital gains so much is that you can usually get tax benefits by holding onto capital assets for more than one year. At that point, it will be classified as a long-term capital gain, which means that you will likely pay a lower tax rate than you would on other forms of income. In fact, at least at the federal level, you could pay no taxes on that capital gain at all if your income is low enough.As we move closer to tax season, I\u2019m going to be writing more articles on taxes, and I will write a specific article on capital gains to cover this topic in more detail. But for right now, that\u2019s a basic working definition of capital gains.5. Time HorizonThe first four points should give you a basic idea of how stocks and funds work, but they don\u2019t necessarily help you pick particular stocks or funds. Of course you want to get dividends and capital gains and you want to maximize your earnings, but it isn\u2019t always clear which assets are going to give you the best chance of achieving those goals.The first thing you need to ask yourself when you\u2019re coming up with an investment plan is how long you have to invest. That length of time is called your time horizon, and your investing strategy will be different for a time horizon of one year compared to a time horizon of ten or twenty years.That might sound counterintuitive if you\u2019re new to investing. You might think that the best investment for one year is also going to be good for two years, ten years, twenty years, or any length of time. In other words, if you expect one investment to grow consistently by ten percent per year and another option to grow by five percent, then obviously the ten percent one is going to be a better value. The problem with this line of thinking is that in general, assets with higher potential gains are also going to have higher levels of risk.Take the S&P 500 for example. In 2008, the S&P 500 dropped almost 40 percent, and if you needed to pull out your money in 2009 then you were probably in trouble. But over the past 75 years or so, since World War II at least, the S&P 500 has consistently performed really well over pretty much any sufficiently long period of time, say twenty years or longer.\u00a0 There might be ten-year periods in there where it lost money, but you will be okay the vast majority of the time.So even though you might have bad years, if you\u2019re investing over a long time horizon, it usually makes sense to take on more risk in order to get better overall growth.\u00a0 On the other hand, if you\u2019re investing on a shorter time horizon, you don\u2019t want to put yourself in a position where your investment loses value right when you need it.In that case, you might want to go with bonds, certificates of deposit, a high-yield savings account, or something else that isn\u2019t going to expose you to a major loss in the short-term. But that is also going to put a cap on your potential growth. I don\u2019t have time to get too deep into specific investing tactics here, but the basic point is that your strategy should depend on how long you\u2019re planning to hold your investment before selling, and that period is called the time horizon.6. MarginMargin trading is more of an advanced strategy, but I still think it\u2019s good to be aware of if you\u2019re new to investing.When you invest, you\u2019re usually buying assets with your own money. Even though a broker might be facilitating the transaction, it\u2019s still your money that\u2019s being used to make that purchase.Margin trading is a little different. You\u2019re not actually using your own money in this case\u2014instead, you\u2019re borrowing money from the brokerage in order to buy more assets. In other words, the brokerage is giving you extra money so that you can buy more than you would be able to with your own cash.OK, you might be wondering why your brokerage would give you money like that. The answer is that they\u2019re treating it as a loan rather than as an investment. And just like with any other loan, you\u2019re going to have to pay interest on the money you borrow from the brokerage. That means that you\u2019ll need to gain enough value to compensate for that interest just to break even.On top of that, the brokerage is also going to take your existing assets as collateral, and you\u2019ll need to have a specific margin account to get started. Let\u2019s say you have $5,000 in a margin account, you borrow $1,000 to buy on the margin, and you eventually have to sell at $800. You took on the risk by buying on the margin, so you\u2019re responsible for making up that $200 loss. And if you don\u2019t have that money in cash, they\u2019re going to take it in the form of the other assets that you have in your margin account, i.e. the ones that weren\u2019t purchased on margin.Furthermore, if your investment is doing really poorly and you get to the point where you\u2019re overleveraged, the brokerage might issue what\u2019s called a margin call. And a margin call tells you that you either need to cash out and sell your assets for a loss, or you need to deposit more cash so that you have enough collateral to hold your investment. So the more value you have to borrow against, the more the brokerage is going to let you borrow.Now again, margin trading is a little more advanced, and it obviously involves more risk because you have to pay the brokerage back whether or not your investment succeeds. So you want to be really careful about margin trading, and you never want to borrow any money you can\u2019t cover. But at the same time, if you can cover the risk, and if you think you can earn enough to make up the interest rate, then it isn\u2019t necessarily a bad idea to borrow against your existing assets. With margin trading, you\u2019ll have the opportunity to earn even more than you would have been able to with whatever cash you have on hand.7. Short SellingThe last point I want to bring up is short selling, which is another term that you might have heard somewhere without really understanding what it means.To be clear, the mechanics of short selling aren\u2019t as straightforward as buying a stock and selling it later. But in basic terms, short selling means that you\u2019re selling a stock now so you can buy it later. And in that sense, it\u2019s basically the same as regular trading\u2014you want to sell the asset for more than you paid for it. The difference is that in this case, the selling happens first and the buying comes at the end.OK, in that sense it\u2019s actually the opposite\u2014you lose money if the asset gains value, and you make money if it loses value.\u00a0 And that can be a little confusing. It doesn\u2019t really make sense that you could sell a stock without buying it, and it\u2019s even less intuitive that you would be able to make money by selling something now and buying it again later on. So let me just quickly lay out what\u2019s really going on when you short sell something.First, you\u2019re going to borrow the asset from a brokerage. You can do this with a lot of the big firms, so let\u2019s say you borrow 100 shares of company A that you think is going to run into some problems. And just to keep things simple, let\u2019s say each share costs $100. 100 times 100, that means you\u2019re borrowing $10,000 in stock.Now if that was the whole story, I would basically be describing regular margin trading. Up to this point, all you\u2019ve done is borrow shares of company A from your brokerage. But from there, instead of holding that asset for future growth, you\u2019re going to immediately sell it on the market for the same $10,000 that you borrowed. So you still owe the brokerage 100 shares in the company, and you\u2019re going to have to give them back at some point, but for now you\u2019ve cashed out for $10,000.And OK, let\u2019s imagine you were right. Company A starts trending down, and pretty soon the share price is down to $80 instead of $100. Remember, you still owe the brokerage a hundred shares, so you use the $10,000 that you earned from selling the borrowed shares earlier to buy 100 new shares back at their new market value of $80 each.That works out to just $8,000, which means that you\u2019ll be able to pocket the remaining $2,000 minus interest, commission, fees, taxes, and any other charges.\u00a0 So when you\u2019re short selling, you want the stock to lose value because that\u2019s also going to reduce the size of your debt. On the other hand, if the share price went up to $120 instead of going down to $80, then you\u2019d be in a situation where you owe the brokerage $12,000 instead of the original $10,000.This strategy is inherently risky, because it\u2019s not like buying assets where you can only lose the amount you invested. If you short a stock and it goes up instead of down, there\u2019s really no limit to how much money you can lose, and you can see this in the worst-case scenarios.Let\u2019s say you shorted Zoom at the beginning of the year. it was trading for around $75 in January, and now it\u2019s over $400. So if you shorted 100 shares in January, you only would have borrowed about $7,500, but now you would owe your brokerage over $40,000.Of course, it\u2019s not going to be that bad in most cases, but you get the idea. There\u2019s a level of risk involved with short selling that isn\u2019t there with buying long, meaning just buying a stock as normal. There\u2019s no upper limit to how much a stock can grow, so you could really lose your shirt if you don\u2019t know what you\u2019re doing when you sell a stock short.On the other hand, when you buy a stock long with your own cash, the worst that could happen is that the stock goes to zero and you lose your initial investment.\u00a0 So again, shorting can be very effective, there are a lot of people who have done really well with it, but you definitely want to understand what you\u2019re getting into before you start short selling.Alright everyone, those are seven investing terms you should know. Are there any other investing words you\u2019d like to learn more about? Let me know in the comments, and I will see you next time."},{"@context":"https:\/\/schema.org\/","@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Passive Income","item":"https:\/\/moneydoneright.com\/passive-income\/#breadcrumbitem"},{"@type":"ListItem","position":2,"name":"Stock Investing","item":"https:\/\/moneydoneright.com\/passive-income\/\/stock-investing\/#breadcrumbitem"},{"@type":"ListItem","position":3,"name":"7 Investing Terms You Should Know","item":"https:\/\/moneydoneright.com\/passive-income\/stock-investing\/investment-terms\/#breadcrumbitem"}]}]