Investing in the stock market is one of the great wealth creators in the world. Many people that invest their funds solely in safer, lower-return assets may never get ahead because their money is growing more slowly than inflation, especially in the current economic environment. So to help make the jump into stocks a little less intimidating, here are five key investment terms you’re likely to hear:
- Bull Market vs. Bear Market – You surely know by now that stocks can be risky and move up or down quite a bit over various periods of time. However, people tend to assign the overall sentiment or mood of a market over time based on how much that market has moved recently. When you’re in the midst of a “bull market,” that means stocks have been performing very well, often up 20 percent or more since their low. And a “bear market” is the opposite, meaning they’ve lost up to 20 percent of their value. This is important because some people see a bear market as an investment opportunity to buy stocks when they’re cheap. Others see it as a warning sign that the decline could continue.
- Buy and Hold Investing – Some people like to trade stocks rather actively, whereas others like to buy some stocks and hang on to them no matter what happens in the near-term. The benefit to buying and holding is that you’re less likely to time the market wrong. Your trading fees will also be lower.
- Market Order – There are different ways to buy stocks. The most common is a market order. What this means is that when you put an order through your broker or online account, the stock will be bought at whatever the current asking price is for the stock. Likewise, when selling, the stock would be sold at the prevailing bid price. This market order concept is simpler than other types like stop-loss orders and limit orders, which have their own pros and cons.
- Leverage – Leverage is the concept of trying to achieve larger returns through the use of borrowing. Some people use what’s called a “margin account,” where they borrow money in their trading account to invest more money. For beginner investors, leverage is best avoided. It’s akin to investing money you don’t have.
- Index – Instead of buying individual stocks, which can be risky, investors often like to buy large baskets of stocks, like the FTSE 100. In doing so, they are not only buying the largest and most popular British stocks, but they are also protecting themselves from a decline in any one stock. And instead of paying a fund manager to try to pick the best stocks, they can usually get a lower-fee fund made up of the same 100 companies, which is called an index. The fact is that most money managers don’t beat a standard index anyway, so this is often a better approach than trying to pick stocks individually or pay for a higher-fee fund that’s actively managed.