Understanding the Language of Investing
Recently in the community, I hosted a financial awareness breakfast for community youth ranging in age from 18 to 30. The program was held at the newly renovated Knish Shop party room and was an eye opener for those in attendance. The seminar covered such topics as saving for retirement, and the time value of money. Better than timing the market is time in the market. Along with guest speaker Neal Lee of Advisors Asset Management, we conveyed to all in attendance the importance of financial responsibility and planning for the future, from an early age.
An outcome of the seminar was the request for more education on the financial planning, as well as to enlighten and prepare others, regardless of age and wealth, with a quick reference of some key terms and definitions. Below are just a few of the most common terms you may hear.
Asset Class: Used for categorizing different types of investments. There are basically three asset classes: stocks, bonds and cash.
Asset Allocation: The process of selecting and blending investments from different asset categories to reduce investment risk and reach long-term investment goals. This refers to how much of your money you put into stocks, bonds and cash equivalents. Proper allocation keeps your money spread over different types of investments, so if one particular type is struggling, the other types could still be doing well. Although it will diversify your portfolio, asset allocation does not protect against fluctuating markets or uncertain returns.
Diversification: The process of deciding what mix of investments to own within each asset category. Diversification helps you spread your investments out even further. Owning stock in companies from a wide variety of industries, for example, puts you in position to see possible benefits from moves in different sectors of the economy.
Dividend: When a company decides to share profits with investors, it usually pays a dividend to stockholders. The company’s board of directors decides when these payments are made, and how much they’ll be.
Exchange: A system for the organized trading of securities. There are several major exchanges in the United States, including the New York Stock Exchange, American Stock Exchange and Chicago Board Options Exchange. Several regional exchanges throughout the country also trade securities.
Over-the-counter (OTC): A highly sophisticated communications network on which dealers trade securities that are not listed on any exchange. All government bonds and all other nonlisted stocks and bonds are traded on the OTC network.
NASDAQ: An electronic information network that provides brokers and dealers with current price quotations on many actively traded over-the-counter securities.
While understanding these terms should help give you a good start, there is plenty more to learn about the world of investments. Another great way to educate yourself is to speak with someone who is well versed in the language. A financial advisor can take the time to explain what everything means, and help you make decisions about how to meet your own personal needs.
Harry Spar is a financial advisor with Wells Fargo. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.