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Learning the definitions is a good introduction to investing basics and can help you navigate the process a little easier. You can use the links below to go to a specific set of terms or keep reading to learn them all. There are several types of investments you may come across when trying to figure out how to allocate your funds. These are some of the most common:. Bonds are loans provided to governments and corporations that pay interest to the investor.
Municipal bonds are the bonds that are issued specifically by the state or local government, while other bonds may be issued by a private company. Bonds are a low-risk investment and are good for beginners. Mutual funds are important when it comes to investment terminology.
With a mutual fund, a company pools money from several investors and invests that money in a portfolio. Real estate includes both residential and commercial properties and can be one of the most lucrative investment opportunities. Short-term real estate investors may flip houses, while long-term investors rely on appreciation to profit off of real estate. Keep in mind that real estate investing is typically more expensive upfront. Stocks are the most common investments you hear about, but what is a stock?
A stock represents a small portion of a company, so owning a stock means you essentially own a portion of a company. A bear market is one of the investment terms to describe stock market conditions. More specifically, a bear market is a period where stock prices are falling, and investing is risky but potentially very rewarding. Common stock is what most people think of when they think of stocks.
Dividends are payments made to shareholders of certain companies. In order to receive these payments, an investor must own stock before the ex-dividend date. This is essentially a reward for investing money in a company. A market index is a portfolio used to track the financial market by analyzing data from specific subsets of companies. Preferred stock is similar to common stock, except shareholders get special benefits such as higher dividend payments and claims to assets if the company is liquidated.
These stocks are less volatile but less profitable. Shareholders are entitled to certain benefits, including capital gains when the company or asset increases in value and dividend payments when it makes money. In basic investment terms, short selling is betting on a security to drop.
Short sellers borrow a security and sell it on the open market, with the hopes that it will drop in price so they can purchase it for less in the future and repay the loan. A stock exchange is a place where stockbrokers and traders can buy and sell shares of stocks, bonds, and other investments. Different stock exchanges have different listing requirements and thus offer different stocks. The stock market refers to all the exchanges where buying and selling take place, but may also be used to refer to the current condition of stock prices in general.
Trying to figure out how to go about investing in your retirement? A k is a retirement plan offered by employers where you contribute money each pay period, and your employer typically matches up to a certain amount of your contribution. Every investment glossary should include individual retirement accounts, or IRAs.
You simply contribute money on a regular basis, allowing that money to build up until you can withdraw it without penalties. If you want to start investing for retirement right away, a Roth IRA is a simple way to get started. This allows you to avoid paying any penalties while keeping the tax-deferred status of your retirement plan.
Retirement planning is the process of creating a financial plan and investing in your retirement. Equity markets This is the market where various economical entities issue financial instruments in order to attract capital. They offer a property right on the issuer and the right to collect dividends when the issuer decides to distribute part of the profit. The players on this market are issuers and stockholders.
Commodities market This is the market where commodities are sold and bought, such as: wheat, corn, soy bean, oil, natural gas, energy, copper, nickel, zinc, lead etc. It is a special financial market, because most of the transactions are done through derivative financial instruments — which we will talk about later. The precious metal market is part of the commodities market. In general, precious metals are traded physically, not through derivative instruments.
FX market Although money is considered a commodity, the FX market is treated differently. It is the most liquid market in the world with a daily transaction volume estimated at around billion dollars. From a transactional point of view, financial markets can be divided in: Regulated markets — organized as stock exchanges stock exchanges, future exchanges etc. The only detail that can be negotiated is the price. The predetermined information is: Trading schedule The size of the contract or transaction — which represents the trading multiple Minimum price fluctuation The daily variation limit Maturity in the case of derivatives Requirements regarding margin in the case of derivatives All these details can be found in the contract specifications which are public and posted on the website of that particular exchange.
Basically, the contract specifications set the game rules. Another specific aspect of this particular market is that transactions are facilitated by brokerage firms which are members of a certain exchange. Those who want to trade must open an account at a broker which will offer them electronic access to the market.
On these markets trades are public. Any player can see the volume of trading and price in real time. Over the counter markets OTC The interbank system is an over the counter market where banks are the main players. OTC transactions are not standardized. In other words, the parties involved in a transaction decide when to trade, the sum of the trade, the maturity if it is required and the price.
We can say that the instruments traded on OTC are tailored according to their needs. For trading they use special electronic systems but they sometimes use recorded confirmations by phone. Another way of dividing the financial markets is between spot markets and derivatives markets. A spot market is a market where the buyer pays the asset in full and the seller delivers the asset in full.
It is also referred to as payment-versus-delivery. The stock market, fixed income financial instruments market, precious metal market and FX market are all spot markets. For example when we buy stocks we pay their cost in full. In order to trade on these markets we need an account where we can deposit the money before buying anything. The money in this account is used to pay the assets you bought.
The spot market is also called an immediate delivery market. In the financial world, immediate usually means two days after the date the trade was made. In other words, the final payment and delivery of the traded asset is done on the second working day from the trading date. A derivative financial instrument is an asset whose price depends on the price of an asset traded on a spot market.
This asset is called underlying. The derivatives market is also called the market with future delivery at a date called maturity.