Over the past few decades, returns for investing have been way better than savings in a bank account. So, logically, investing is a popular choice right now. In 2020 and 2021, tens of millions of people invested for the first time. Many have had a little or a lot of success, but many others have also lost money.

I am writing this to share one secret to help you be more successful in your efforts to grow your hard-earned funds. There are other important things to know, but this one is very important. If your investments are like a building, this is your foundation.

If you can’t seem to get control of your personal finances, read this explainer first.

Basic Definitions

There are 15 terms you should know before you start investing. But why the heck do you need to look these up?

Speaking from experience, words you do not fully understand are a hidden enemy. If you go past one without clearing it up, you risk not understanding broader concepts. These misunderstood words can also cause one to:

• Make stupid mistakes.
• Forget entire paragraphs or pages you read.
• Change the sequence or forget important steps of an action.
• Give up or “blow” from a subject.
• Mentally avoid a subject completely or miss important details.

This is important in investing since you are usually dealing with your hard-earned money.

Stocks

A stock is a percentage of ownership in a company and is divided into shares. Corporations issue (sell) stock to raise funds to operate their businesses. These give the owners certain rights. This can include the right to vote on certain issues and receive dividends. Stocks are usually bought and sold on stock exchanges, but there can be private sales as well. Historically, they have outperformed most other investments over the long run.

Bonds

A bond is essentially a loan, but you are the lender. Generally, bonds have an exact pre-agreed upon term such as one or ten years and yield (the percentage interest that you get paid).

Bond prices are correlated opposite to interest rates: when rates go up, bond prices fall and vice-versa.

Bonds are generally considered more stable than stocks and also offer less returns. You can also buy and sell bonds in a market like you do stocks.

Here are some common types of bonds, with different levels of risk and reward:

• Government Bonds: The US Government issues bonds called Treasury Bonds or T-Bills. So do local governments, which are often called Municipal Bonds or “Munis”. Other countries also issue government bonds with varying levels of risk and reward.
• Corporate Bonds: Large Corporations with good credit also issue bonds, generally considered riskier and with higher returns than government bonds.
• Junk Bonds: These are bonds from corporations with bad credit who use these to attempt to stay afloat and offer higher returns than corporate bonds. They are considered far riskier than the other types of bonds because the possibility that the company could go bankrupt before it pays off the bond is high.

Real Estate

Real estate is tangible property, such as land or buildings, that the owner can use or allow others to use in exchange for payment. When you own a house, you own real estate. When you own a plot of land, you own real estate.

Precious Metals

Precious metals are metals that are rare and have a high economic value due to various factors, including their scarcity, use in industrial processes, and role throughout history as a store of value. The most popular precious metals with investors are gold, platinum, and silver.

Bitcoin

Satoshi Nakamoto, the assumed name for an unknown person or group of persons, invented Bitcoin. Launched in 2009, Bitcoin was the first decentralized, democratic, programmably scarce, digital currency and settlement network backed by an open-source code. Unlike fiat currency, Bitcoin is created, distributed, traded, and stored with the use of a decentralized ledger system, known as a blockchain. Only 21 million Bitcoin will ever exist.

As a newer asset class, Bitcoin has a lot more volatility than traditional asset classes such as stocks, bonds, real estate, or precious metals. For a deeper dive, read this full explainer on Bitcoin.

Cryptocurrency

A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities. The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.

Bitcoin was the first and is the largest cryptocurrency by network size and value. There are now thousands of cryptocurrencies. Some other popular cryptocurrencies include Ether, Cardano, and Dogecoin.

Market Capitalization

Market capitalization or “market cap” refers to the total dollar market value of a company’s shares on the stock market. It is calculated by multiplying the total number of a company’s shares on by the current market price of one share.

When referring to cryptocurrency, this refers to the total value of all that cryptocurrency in existence. This is calculated by multiplying the price of one coin by the total coins currently in existence.

Dividends

A dividend is the where a company pays out some of its earnings to people who own shares in that company. This is determined by the company’s board of directors and is made publicly available. A dividend is one way to reward investors for putting their money into the company. Dividends are generally more common with value stocks and larger, older companies than growth stocks.

Value Stock

A value stock is often contrasted with a growth stock. Value stocks are companies whose shares appear to be undervalued in the stock market. A value stock usually appeals to investors by having higher earnings compared to its price per share and by paying dividends. They tend to be more stable and less volatile in price than growth stocks.

Growth Stock

Growth stocks are often contrasted with value stocks. Growth stocks are companies expected to grow sales and earnings at a faster rate than the market average. These stocks often look expensive, but could actually be cheap if the company continues to grow rapidly, which will drive the share price up. Growth stocks typically don’t pay dividends. They tend to be more volatile in price than value stocks.

S&P 500

The S&P 500 Index, or the Standard & Poor’s 500 Index, is a tool that tracks the value of about 500 large U.S. publicly traded companies. It is so commonly used, professional traders and institutions gauge their success against this index, and it is often referred to as “the market”.

Companies with a higher market cap have a greater influence on the index. This is different than how the Dow Jones is tracked (by share price). For example, as of July 29, 2021, Apple was worth over $2.39 Trillion in market cap, so its price makes about 6.1% of the total index. Campbell’s Soup company is worth a little over $13 Billion in market cap, so its price is only about 0.023% of the index.

84% of companies in the S&P 500 pay dividends, thus it is generally considered to be composed of a mix of both growth and value stocks, but with more value stocks.

Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA), and sometimes “Dow” for short, is a tool that tracks 30 specific large, older, and stable companies on the New York Stock Exchange and the NASDAQ. The index was created by Charles Dow in 1896 to serve as a representation for the broader U.S. economy.

Companies with a higher price for an individual share of stock have a greater influence on the index. This is different than how the S&P 500 is measured (by market cap). For example, as of July 29, 2021, Goldman Sachs is worth about $376 per share, so makes up 7.05% of the index. Apple is worth about $145 per share, so makes up about 2.73% of the index.

This shows one of the ways that these two indexes are different — since Apple has a market cap almost 20 times larger than Goldman Sachs.

100% of the 30 companies in the Dow pay dividends, thus are generally considered value stocks.

NASDAQ Composite Index

Nasdaq is a global electronic marketplace for buying and trading securities. It was the world’s first electronic exchange. Most of the world’s technology giants, including Apple and Facebook, are listed on the Nasdaq.

“Nasdaq” also refers to the Nasdaq Composite Index — a tool that measures more than 2,500 stocks traded on the Nasdaq exchange. As of March 2002, 48% of the index is made up of technology companies. There are also a lot of consumer services (19%), health care (10%), and financials (7%) as well.

Companies with a higher market cap have a greater influence on the index, like the S&P 500 index. There is a smaller percentage that pays dividends, and a higher number of growth stocks than the indexes above.

Russell 2000

The Russell 2000 index, created in 1984 by the Frank Russell Company, is comprised of 2,000 small-capitalization companies, which generally means a market cap of $300 million to $2 billion. An example of a small-cap stock would be Groupon, which has a market cap of of just over $1 billion as of June 29, 2021.

Historically, it is generally believed that small-cap stocks do better in a period with lower interest rates and have more growth potential.

It is also generally believed that small-cap stocks do worse in a recession and have greater risk than larger companies.

ETF

An exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock. Like a stock, ETF share prices fluctuate all day as the ETF is bought and sold.

ETFs can contain all types of investments, including stocks, commodities, or bonds; some offer US-only holdings, while others are international. Because of this, they are generally more stable and less volatile than individual stocks.

Emerging Markets

An emerging market economy is an economy that is in the process of becoming a developed economy. They typically are in the process of industrializing. Emerging market economies can offer greater returns to investors due to rapid growth but also offer greater exposure to some inherent risks due to their status. Currently, some notable emerging market economies include Brazil, China, India, Indonesia, Mexico, Nigeria, Pakistan, Russia, Saudi Arabia and Vietnam.

To learn more about misunderstood words from the author of the source material, read this booklet.

If you enjoy reading stories like these and want to support me as a writer, consider Subscribing.

This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.