Today I’ll break down 5 common investment terms you need to know in order to know what options you have when investing your money. 

A stock is a portion of a company.

Think of it like a pie! If the pie is cut into slices, stocks are the slices. If the company grows, your slice gets bigger and you can sell it for more than you bought it! If the company does poorly or shrinks so does your slice, and selling would actually lose money.

Losing or making money on a stock depends on the company and how they do over the course of you owning the stock.

A bond is basically a loan.

It’s essentially saying “I will loan out my money in exchange for interest. I expect to get that money back over a period of time, but with interest.” This is where bonds are a little less risky. They’re more like a loan rather than owning a piece of a company like you would with a stock. 

This is giving the company money with the expectation of getting that money back. With a stock, there’s no expectation for getting money back until you sell. With a bond, at the end of the term you get your money back as well as the interest you’re owed.

A mutual fund is like a basket of stocks.

If you own a mutual fund, you own all the stocks in that mutual fund however you have no control over which stocks those are. These stocks are chosen by the money manager. Mutual funds have a manager that is deciding what stocks and how many are included in the fund. They pick what stocks they think will perform the best over the chosen time frame of the fund. 

The money managers usually expect the fund to perform a certain way based on the type of fund they manage. This could be something like a growth mutual fund or a conservative mutual fund.

An ETF known as an exchange-traded fund is similar to a mutual fund in the fact that it is a basket of stocks, but these are designed to mirror an index in most cases.

For example, the S&P 500 could be mirrored in an ETF that contains all 500 stocks. These are not actively managed by a manager, so there’s no picking and choosing which stocks are in the fun, it’s just all of the stocks in the index are included in your fund. 

Historically, not a lot of money managers outperform these indexes. They just don’t have the ability to truly and consistently pick ‘winners’. Trends are leaning towards ETFs for this reason. They are a low-cost option in comparison to a mutual fund and they do very similarly. Both are great ways to take the decision off your shoulders when investing. 

A penny-stock is basically a stock that is trading less than $5.

These are very risky. They are not established companies, most of them have no track record and some even go out of business. If you do decide to invest in a penny-stock, don’t expect to go very far with them. They will not transform into the next Amazon. 

With these 5 terms, you’re ready to begin your investing journey!