Step 3 - Understanding the lay of the land
Now that you’re free from debt and are steadily building up your savings, you’re probably eager to get your money into the market as quickly as possible. However, before going anywhere, you need to understand the lay of the land. First, there’s the language. There are hundreds of investment terms tossed around on Wall Street, and you’ll want to know what they mean.
Second, investing is a whole lot more than just “buy low and sell high.” Understanding the basic concepts that govern the market is key to being a successful investor. So, before you cut your teeth on your first stocks, take the time to learn all you can about investing.
You can start with some easy books. We suggest:
- The Intelligent Investor by Benjamin Graham
- The Essays of Warren Buffett
- A Random Walk Down Wall Street by Burton Malkiel
- The Bogleheads’ Guide to Investing
You may also want to browse through these online guides and resources:
- The BlackRock Blog
- The Money Tree Investing Podcast
And finally, here are 25 important investing terms along with their basic definitions to help get you started:
- Ask: The lowest price an owner is willing to accept for an asset.
- Asset: Something that has the potential to earn money for the owner.
- Asset allocation: An investment strategy that balances risks versus rewards by adjusting the percentage of each asset in your portfolio by asset class. This limits some of your risk by allocating your portfolio according to your particular risk tolerance, goals, and investment time frame.
- Balance sheet: A statement showing what a company owns, the liabilities the company has, and the company’s outstanding shareholder equity.
- Bear market: A market that is falling.
- Bid: The highest price a buyer is willing to pay for an investment.
- Blue chips: Companies that have an established history of good earnings, good balance sheets and regularly increasing dividends.
- Bond: An investment that represents what an entity owes you. Essentially, you lend money to a government or a company and you are promised that the principal will be returned along with a predetermined interest value.
- Book value: The number reached if you would take all the liabilities a company has and subtract them from the assets and common stock equity of the company.
- Broker: The entity that buys and sells investments on your behalf, usually for a fee.
- Bull market: A market that is likely to gain.
- Capital gain (or loss): The difference between what you bought an investment for and the amount for which you sell it.
- Portfolio diversity: A portfolio characteristic that ensures you have more than one type of asset and/or are buying investments in different sectors, industries or geographic locations.
- Dividend: A distribution of a portion of a company’s earnings to its shareholders. Dividends can be paid only once, or they can be paid more regularly, such as monthly, quarterly, semi-annually, or annually.
- Dow Jones Industrial Average: An average of a list of 30 blue chip stocks.
- ETF: A bundle of stocks managed by a professional investor.
- Exchange: A place where investments, including stocks, bonds, commodities, and other assets are bought and sold.
- Index: A tool used to statistically measure the progress of a group of stocks that share characteristics.
- Margin: Borrowed money used to make an investment.
- Market capitalization: The number you would get if you multiplied a company’s current share price by the number of shares outstanding.
- NASDAQ: A stock exchange that focuses on trading the stocks of technology companies.
- New York Stock Exchange: One of the most famous stock exchanges, the NYSE trades stocks in companies all over the United States and in some international companies.
- P/E ratio: This measure reflects how much you pay for each dollar that company earns. The higher a P/E ratio is, the higher the earning expectations.
- Stock: A piece of a company. Companies divide their ownership stakes into shares, and the amount of shares you purchase indicates your level of ownership in the company.
- Yield: The ratio between the stock price paid and the dividend paid, measured as a percentage.