If you are interested in becoming a first time investor, you may have stumbled upon more than a few words you did not know the meanings to when doing some initial research. Learning terms associated with investing is almost like learning a new language. It is important that you learn these terms before you look for the answer to the most commonly asked question – “What stocks should I invest in?” This post will provide you with the investment definitions to some basic terms so that you can get a handle on the information you need to get started.
Risk Return Ratio
Also known as risk/reward ratio, this term stands for the results of a mathematics calculation involving the amount of money you may lose if the stock takes an unexpected turn for the worse divided by the amount of money you expect to have made by the time you buy out. Risk/reward ratio is a key factor in determining whether or not you stand to make any money from a particular investment, so be sure to learn more than just the basic definition of the word.
Despite what common sense may be telling you, security has nothing to do with the safety of your money. Security is simply another word for stock, equity or share. Therefore a CSX quote refers to the price of each security or stock. Whichever one of these words you see in your research, they all mean the same thing.
Ask and Bid
The terms ask and bid are closely related in the investment world, hence why the two are paired together in this post. The word ask refers to the lowest price a shareholder is willing to sell a stock for. On the other end of the exchange, bid can be defined as the highest price a buyer will be willing to pay when purchasing a share. An easy way to remember this is to relate seller to an asking price and buyer to placing a bid.
Closely related to the above definitions, spread refers to the difference between the ask and bid of a particular stock. In order to fully understand the concept of spread you will need to do further research as there are several factors that can play a role in the spread of a specific security.
The word yield can be defined as the money you make from a particular investment, whether you trade online or using a brokerage firm. Yield is expressed as a percentage, not a set dollar amount, because the exact amount that is gained differs based on how much money was initially invested. Certainly, you would like to keep you yield a positive number to show an earning on your investments.
P/E ratio refers to the amount of money you, the investor, will spend per dollar the company you are investing in makes. The higher the P/E ratio of a company you are interested in investing in, the better. The higher that ratio is, the more money people expect the company to make which means increased profits for investors like you.
Assets can be defined as any thing that can make you money. An asset can be a stock, endowment or bond. But, it can also be a bond, real estate or goods like pieces of art or jewelry. Remember this when you come across the word in your research so that you can be sure of what exactly is being referred to.
Asset allocation is the manner in which your assets or holdings are distributed. One of the methods for dividing your holdings is to categorize them by asset class. Various assets perform differently from one another. That is why this method is used as a method of limiting investment risk. If you hear someone talking about asset allocation, they are referring to the use of asset class as a means of categorizing their investments.
Learning investment definitions for beginners is like learning a new language. This post will not make you fluent in investment terminology, but it is a great place to start. The above terms are some of the most basic ideas involved with investing. These terms are also likely to be the ones you come across most often when doing research to prepare yourself for first time investment. Now that you have a grasp on these foundation words, you will be better suited to conduct further research on investing. Understanding these definitions will better prepare you for a lucrative future in investing. You are now on your way to becoming an experienced investor!