If you’ve spent so much as 10 minutes reading a personal finance blog — and clearly you have — chances are, you’ve heard that investing is one of the best ways to put your money to work for you.The power of compound interest can turn even modest savings into an appreciable nest egg over time. And best of all, it’s passive income.
But if you’ve never put money into the stock market before, the prospect can be overwhelming. What exactly does “buying stocks” even mean? And what kind of account do you need to get started?
If you’ve spent so much as 10 minutes reading a personal finance blog — and clearly you have — chances are, you’ve heard that investing is one of the best ways to put your money to work for you.The power of compound interest can turn even modest savings into an appreciable nest egg over time. And best of all, it’s passive income.
But if you’ve never put money into the stock market before, the prospect can be overwhelming. What exactly does “buying stocks” even mean? And what kind of account do you need to get started?
One of the first things new investors come to realize is how much lingo there is to know. It’s hard to feel confident about spending your money on stocks, bonds or mutual funds when you’re not even sure what any of those words mean!
The good news is, nobody knows what they’re talking about (or which words to use) when they’re first getting started. Here’s a quick vocabulary rundown.
Stocks
The stock market is what we call the abstract space where investors buy and sell investments. There are many different types of investments, or “assets,” you can buy and sell on the stock market.
Stocks are shares, or small pieces of asset ownership, of a company. Stockholders earn money when the company performs well and increases in value — but they’re also vulnerable to losses if things don’t go as well as hoped. Thus, stocks can be a relatively high-risk investment.
Bonds
Bonds are another common type of stock market investment, but they work differently than stocks do. Bonds are actually debts owed by corporations or, more commonly, governments.
When you purchase a bond, you’re essentially lending your money to the bond issuer. Bonds help investors earn money by accruing interest — and because bond issuers are obligated to repay their debts, they’re considered a safer investment than stocks.
What’s more, bonds are repaid after a fixed amount of time and at fixed rates (which is why they’re known as “fixed-income” assets), making them a reliable source of investment return. However, they don’t have the exponential growth potential that stocks do.
Mutual Funds
Mutual funds are pre-built collections of stocks, bonds and sometimes other types of investment assets, like real estate, which are created and managed by financial professionals.
Investing in mutual funds allows individual investors to buy a diverse segment of the market without doing all the research and footwork to assess individual stocks themselves.
Index Funds and Exchange-Traded Funds (ETFs)
These funds are similar to mutual funds in that they include a basket of different assets, but they’re not generally actively managed by a live human being. Instead, index funds are created based on a specific market index, like the S&P 500 or the Dow.
A market index is a representative collection of stocks that are used to track the performance of an area of the market.
Exchange-traded funds might be collections of companies that share industries, geographical locations or market capitalization — that is, the total dollar amount of the shares of the company available on the market.
Unlike mutual funds, they’re also traded throughout the day on the exchange, which may make them a better option for investors looking to play a more active role in their portfolios.
Investment Portfolio
Your investment portfolio is the collection of all the investments you make and keep, otherwise known as your “holdings.” For example, you may have 12 shares of Corporation X, 27 shares of Corporation Y and 17 shares of an ETF which includes stocks, bonds and real estate.
Phew! It really is a word salad, huh? Now that you’ve got a better handle on basic investing terms, let’s learn more about doing some actual investing of your own.
How to Get Started With Investing
How best to get started investing will vary depending on your personal financial goals, as well as the amount of money you can afford to put toward your growing portfolio.But if you don’t have a whole lot of extra cash lying around, don’t worry; there are many ways into the world of investing, even if your initial investment is only $100 (or less!).
Aside from building wealth in general, one of the most common investing goals is to save for retirement. If that goal’s on your list, you’ve got lots of investment vehicles to choose from.For example, if your employer offers a 401(k), contributing part of your wages to that company-sponsored retirement account is a way to get started investing. And if your benefits package includes an employer match, you’ll definitely want to take advantage of that — it’s free money! Depending on your plan, you may have just a few curated investment options to choose from or access to a wide variety. (Psst — we’ll talk more about some basic investment skills in a second, so don’t hit that “buy” button just yet!)
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