Do your eyes glaze over when someone starts talking about investing? Maybe it’s because you aren’t familiar with the language! Below are some common investment terms that we use every day and their definitions. Call us if you have questions – we specialize in translating “financialese” to simple English!
Asset allocation is an investment strategy that aims to balance risk and reward by dividing a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon (how long the investor will hold the asset before needing the money for other purposes). The three main asset classes – equities, fixed-income, and cash and equivalents – have different levels of risk and return, so each will behave differently over time. In general, equities are considered to be more risky (with higher reward) than fixed income, and fixed income is considered to more risky (with higher reward) than cash or cash equivalents.
At Wisdom Wealth Strategies, we often use the term “equity” interchangeably with “stock.” An equity security represents ownership interest held by shareholders in a company, partnership or trust and realized in the form of shares of capital stock (either common or preferred stock). Equity securities often pay out dividends. Holders of equity securities are able to profit from capital gains when they sell the securities (if the equity securities have increased in value). The holder of an equity security has some control of the company on a pro rata basis, via voting rights.
Fixed Income Security
We use the term “fixed income” as a synonym for “bonds” because bonds typically pay a fixed rate of interest over the term of the bond. A bond is a type of debt security which represents money that is borrowed and must be repaid, with terms that stipulate the size of the loan, interest rate and maturity or renewal date. Debt securities, which include government and corporate bonds, generally entitle their holder to the regular payment of interest and repayment of principal at the end of the term (regardless of the issuer’s performance).
Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.
A security is a tradeable financial asset that has some kind of monetary value. The term usually refers to an equity security or a fixed income security. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.
*Credit: Investopedia at www.investopedia.com.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.