Know the terminology
Once upon a time investing was something reserved for the rich, and people with the know-how and knowledge to make their money work for them. The good news is that in the last 25 years, investing has become much more mainstream and accessible to the average worker. Day trading hit a fever pitch in the early 2000s, and now, in 2017, apps and online banks are making it easier and easier for beginners to invest their money. Many offer special programs, touting investing for beginners as a catchphrase. Making investing accessible to beginners is a great thing, but even with the accessibility, there are some terms you should know before you jump into the investing game.
Common Stocks – Common stocks are stocks that represent ownership. When you buy a stock, you own a percentage of the company, based on how many stocks are outstanding and how many stocks you purchase. Because you are an “owner,” you are entitled to a portion of the company’s profits. The amount you receive, known as a cash dividend, is dependent on the company’s performance, your stake in the company, and the number of stocks that are currently circulating for that particular company.
Preferred Stocks – Preferred stocks are a bit different than common stocks. You, as the investor, would purchase a preferred stock similarly to how you purchase a common stock, but you place down a specific amount of money and are offered a guaranteed percentage of return. If you were to invest $5,000 in a preferred stock at a 5% return, you would receive $250 per year in dividends as long as you held the stock.
Bonds- Bonds are a popular investment choice because they offer greater security in volatile markets. A bond is an agreement in which you lend money to a company, and they agree to pay it back on a specific date; generally known as the maturity date, at a specific rate of interest. Interest is paid out each year. Now, there are many different types of bonds, including savings bonds, investment grade bonds, and junk bonds. It is best to research each type of bond to figure out which is the best fit for your financial situation.
Blue Chip Stocks – These are simply stocks that are associated with a large business with more than $5 billion in market capitalization. These companies have a proven track record of dividend returns and are leaders within their industry. Coca-Cola, for example, is a blue chip stock. While it might seem like a great idea to buy such stocks, experts advise against placing all of your money in blue chip stocks, and, instead, suggest diversifying to see the best return.
ETF – ETF stands for exchange traded fund. These are simply securities that are traded on a stock market. Because they are traded throughout the day, prices can rise and fall over the course of a day, week, or month significantly. They have a high liquidity and are preferred by many day traders.
While trading apps have paved the way for investing for beginners, there are some common terms you’ll need to know before you jump in and start throwing your money around. It is always wise to sit down and speak with a financial advisor before making any investment decisions. They can guide you through the process and offer beginner investing information that will make your journey into the investment world much smoother.
* Independent Bank is not recommending a specific type of investment, and the user is responsible for researching the investment before purchase.
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