Demystifying investment jargon: 12 key terms and concepts

A Beginner's Guide to Investing Basics

Investing is important for reaching your financial goals and building a financial safety net. But getting started can be difficult when you're not familiar with the language. There's a lot of jargon to learn, and it's not always clear where to start. So, here are simple explanations for 12 important terms and concepts that every investor should know.

Asset allocation

Your asset allocation describes how your investments are split into different asset classes, such as stocks, bonds, and cash. Different types of assets tend to be more or less risky, and having a mix of assets can help investors find the right balance between risk and potential returns.

Asset allocation tends to be described in percentages. For example, your asset allocation might be 60% stock, 30% bonds, and 10% cash.

As an investor, you can monitor the asset allocation of money in a specific investment portfolio (an account or group of accounts) and your overall asset allocation. There's no "correct" allocation, it depends on how much risk you're comfortable taking and your financial goals.

Bonds

A bond is similar to a loan, but you're lending money instead of borrowing it. You can lend money to companies, cities, and even the federal government by buying their bonds. You'll then receive interest payments - also called coupon payments - and get the original amount back when the bond matures.

Investing in bonds is also called fixed-income investing because the coupon payments generally stay the same throughout the bond's term. It tends to be less risky than investing in stocks, but it can still be risky, and there's less potential for earning money.

Capital gains

Your capital gains are the money you earn from investments. The distinction between regular income and capital gains is primarily important because of the potential impact on your taxes.

If you hold an investment for less than a year before selling, your profit will usually be classified as short-term capital gains and taxed as regular income. However, if you hold an investment for at least 366 days, the profits could be considered long-term capital gains and may be taxed at a lower rate.

When you lose money on investments, your capital losses can offset capital gains to lower your tax bill. If you have more capital losses than capital gains, some of the losses can also lower your taxable income.

Diversification

Diversifying what you invest in can help minimize how much risk you're taking. For example, if you invest all your money in a single company's stock, you risk losing all your money if the company goes bankrupt. You can decrease your risk of losing all your money by investing in two companies instead.

You can diversify across asset classes by holding a mix of stocks, bonds, cash, and other types of investments. You can also diversify the investments you make within each asset class. For instance, owning stock in small, medium, and large companies from different industries.

Rather than buying individual stocks or bonds, many investors purchase funds that hold hundreds or thousands of stocks or bonds. Investing in funds can make diversifying your portfolio easier.

Dividends

When you buy a stock, you become a shareholder and partial owner of a company. Some companies choose to send a portion of their profits to shareholders, and these payments are called dividends.

Companies often pay out dividends quarterly or annually, and the amount you receive depends on how many shares you own. If you invest in a fund that holds dividend-paying stocks, you might receive your portion of the dividends from the fund.

Exchange-traded funds (ETFs)

An exchange-traded fund (ETF) is a single investment product that often holds a collection of stocks, bonds, or other types of investments. The name comes from the fact that ETFs are listed on stock exchanges and you can trade (buy or sell) shares in the fund throughout the day.

Many ETFs are passively managed, meaning they're created to automatically track an index. For example, an ETF might track a total market index and rise or fall based on changes in the overall stock market. You could quickly and easily diversify your investments by purchasing shares in an ETF.

Expense ratios

ETFs and mutual funds often charge an expense ratio, which is how much you'll pay in fees to own the fund. The fees are expressed as a percentage. For example, if a fund has a 0.50% expense ratio, you'll pay $5 in fees each year for every $1,000 you invest.

Mutual funds

Similar to ETFs, a mutual fund allows you to make a single purchase and invest in a pool of underlying assets. Unlike ETFs, mutual funds are traded once a day rather than throughout the day on a stock exchange. Also, instead of passively tracking an index, many mutual funds are actively managed and a fund manager will buy and sell assets to try and offer a better return than an index.

Portfolios

A portfolio is a group of assets. You might have portfolios with different assets and asset allocations based on the goal for that portfolio - such as a retirement portfolio and down payment portfolio. Managing the asset allocation in each portfolio is important. Additionally, you may want to consider your overall asset allocation based on all your savings and investments.

Rebalancing

Your asset allocation can change as your investments increase or decrease in value. Regularly rebalancing your investments - buying and selling assets to get back to your target asset allocation - can be an important part of managing your investments.

Say you start at 60% stocks, 30% bonds, and 10% cash in a portfolio. Over time, your stocks have increased in value faster than your bonds and cash, and you now have 67% stocks, 31% bonds, and 2% cash. You might rebalance your portfolio by selling stocks and bonds or temporarily stop investing to increase your available cash.

Risk tolerance

Your risk tolerance describes how much risk you're willing to take in exchange for potentially earning money. For example, are you willing to lose 20% of your money and potentially gain 11%? Or, would you prefer to limit your risk and maybe lose only 5% in exchange for potentially earning 6%?

Risk tolerance can change over time and can also depend on your financial goals. You might want to play it safe if you're investing for retirement or a college fund, but be willing to take more risk if you have extra funds that you're for a more fun goal.

Stocks

You can invest in companies by buying the company's stock, which you can do by purchasing shares in the company or buying a fund that has shares in the company. Investing in stocks is also called equity investing, and the terms stocks and equities are sometimes used interchangeably. Investing in stocks tends to be riskier than investing in bonds, but it could also lead to potentially larger gains.

Valley's Digital Wealth Advisor makes investing accessible

Investing can be confusing and overwhelming. And even if you have a general idea of what to do, managing your investment portfolio can be time-consuming and difficult.

At Valley Bank, we offer customers a safe, easy, and affordable way to invest. Traditional financial advisors might require you to have hundreds of thousands of dollars, but you can get started with our Digital Wealth Investor platform with just $500. There's also a low 0.50% advisory fee - half of what many advisors charge their clients.

"As an investor, you don't have to do much once you open your account," says Joel Vanovitch, Head of Investment and Core Banking Operations at Valley Bank. "We'll do the rebalancing, and you can monitor your investments from the website or on the mobile app."

You can get started online, and we'll suggest one of our professionally crafted portfolios based on your answers to a few basic questions about your goals and risk tolerance.

For informational/educational purposes only. The information in this content is not advice on legal, tax, investment, accounting, regulatory, technology or other matters. You should always consult your own financial, legal, tax, accounting or similar advisors before making any financial or investment decisions, or entering into any agreement for Valley products or services.

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