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Your Investing 101 Glossary

Your Investing 101 Glossary

Using your HSA to pay for qualified medical expenses tax-free is great, but investing your funds and letting them grow tax-free is even better. If you aren’t a seasoned investor yet, here are some common terms and ideas to help get you started.

 

Annuity: An annuity is a contract between you and an insurance company where you pay a fixed amount to the company, then the company gradually pays you back at a later time. The benefit of annuities is that they can provide a fixed income stream in retirement.

Asset: An asset is any resource that can earn value. In investing terms, assets include stocks, bonds, and more.

Asset allocation: Asset allocation refers to which categories you’ve put your money in (cash, bonds, or stocks).

Basis points: 1 basis point is 1/100th of a percent (that’s 0.01% or 0.0001). Basis points are often used to measure interest rates or fees.

Bear market: A bear market is a declining market; a “bear” is someone who thinks the market is moving towards a drop.

Bonds: A bond is a loan to the government or a company. On a bond’s maturity date, your loan will be returned to you with a specified amount of interest. Bonds are generally less financially risky than stocks but typically have lower potential for return.

Bull market: A bull market is an increasing market; a “bull” is someone who thinks the market is moving towards a climb.

Capital gain/loss: A capital gain or loss is the difference between what you paid for an asset and what you sold it for. If the difference is positive, you have a capital gain; if the difference is negative, you have a capital loss.

Cash: In the investing world, cash typically refers to certificates of deposits (CDs), money market accounts. Cash investments are typically very secure but generally have low returns.

Compound interest: Compound interest refers to when a deposit or investment accrues interest on previous interest gained, as well as on the principal (the initial amount deposited or invested).

Diversity: In the investing world, diversity refers to how many different types of assets you have in your portfolio. The more kinds of asset in your portfolio, the more diverse your portfolio is.

Dividend: A dividend is a payment made by a corporation to its shareholders from the corporation’s earnings. Dividends can be either cash or stock.

Exchange-traded fund (ETF): ETFs are investing tools similar to mutual funds, but typically with lower fees. ETFs can be traded throughout the day, as opposed to mutual funds, which are traded at the end of the day.

Expense ratio: An expense ratio is the annual fee a fund manager charges to manage your money. An expense ratio is typically a percentage of the money you have invested with the fund manager.

Index: Indexes measure the price change of groups of stocks or bonds that represent part of the overall stock market. By following indexes, you can get a good estimate of the stock market’s behavior (similar to how you can use surveys to get an estimate of a larger population’s behavior). Mutual funds composed of the assets that make up indexes are called index funds.

Inflation: Inflation refers to the increase of prices over time, leading to a decrease in currency’s purchasing power.

Liquidity: Liquidity is how easily an asset can be converted into cash. The more easily an asset can be converted to cash, the higher the liquidity.

Market value: Market value is how much your shares of stocks are worth. You can find market value by multiplying the number of shares you own by the stock’s current price.

Mutual fund: A mutual fund is when a group of investors pool their money to invest together as one fund. Mutual funds are overseen by fund managers, who sell and buy assets to create a return for the investors. Mutual funds can either be closed-end (a set number of shares in the fund) or open-end (no set number of shares). No-load mutual funds don’t charge a sales commission, while load funds do.

Portfolio: A portfolio is a group of investments.

Price per share: This is the amount of money it costs to buy one share of a company’s stock.

Prospectus: A prospectus is an in-depth guide containing details for an investing asset. A prospectus is a required legal document and must be filed with the Security & Exchange Commission (SEC).

Rebalancing a portfolio: Rebalancing a portfolio is buying or selling assets in order to move your portfolio to a desired asset allocation level.

For instance, you could choose for your portfolio to be 60% stocks and 40% bonds. However, if bonds performed well over a period of time, your portfolio percentage of bonds could have risen to 50% (moving your percentage of stocks down to 50%). Rebalancing would be selling bonds and buying stocks to move your stocks and bonds portfolio percentage back to your original goal.

Return on investment (ROI): ROI shows how much profit you made on an investment compared to your original investment cost. The higher the ROI, the more money you made.

Stocks: A stock is a share of a company. When you buy a stock, you are buying a piece of a company. If the company gains value, your stock will increase in value as well. Stocks are generally more financially risky than bonds but typically have higher potential for return.

Target-date fund: A target-date fund is designed specifically for your expected date of retirement. Generally, target-date fund will be weighted more towards riskier, high-potential assets like stocks while the target fund is far away, then move towards lower-risk assets like bonds as the target date gets closer.

Volatility: Volatility refers to the possibility of your investment’s price fluctuating. The higher the volatility, the higher the chance of your investment either gaining or losing value.

 

Want to become an HSA investing expert? Get the Ultimate Guide to Investing Your HSA

Author: James Denison