Investment terms you need to know.
How and where you invest your money is an important decision. However, fully understanding your investments can require a crash course in terminology. The following investment definitions for a few key terms can help increase your understanding of the investment process and enable you to make more informed financial decisions.
Types of investments
The most common terms that are related to different types of investments:
- Bond: A debt instrument, a bond is essentially a loan that you are giving to a governmental entity or a company in exchange for a pre-set interest rate. Typically, the bond pays periodic interest (coupon payments) during its term, and it matures on a specific date. Most bonds are denominated in $1,000 face-value increments, though they can sell above or below that price, particularly in the secondary market. Upon maturity, the bondholder will receive the face value of the bond—no matter what price he/she paid for it. Depending on what price you paid, you may experience a gain or loss on the price of the bond itself (however, considering interest payments, you may experience a positive total return and there are return metrics that can estimate such total returns).
- Stock: A type of investment that gives you partial ownership of a publicly-traded company. Such ownership entitles you to any dividends that may be paid and you may experience gains or losses on your holdings over time.
- Mutual fund: An investment vehicle that allows you to invest your money in a professionally-managed portfolio of assets that, depending on the specific fund, could contain a variety of stocks, bonds, or other investments.
- Exchange-traded fund (ETF): Funds – sometimes referred to as baskets or portfolios of securities – that trade like stocks on an exchange. When you purchase an ETF, you are purchasing shares of the overall fund rather than actual shares of the individual underlying investments.
Investment strategies
Once you have a better understanding of the investment choices available, you may come across specialized terms that explain how money can be invested:
- Asset allocation: This refers to how you divide up your portfolio among different asset classes, such as stocks, bonds, and cash alternatives, to help you work toward your financial goals.
- Diversification: Closely related to the concept of Asset Allocation, this is the practice of spreading your money across different investments to reach your desired asset allocation. One should also diversify within asset classes.
- Dollar cost averaging: A strategy that involves purchasing a fixed amount of an investment at a predetermined interval, $500 per month, for example, regardless of the price.
Investment terminology
There are a variety of financial terms that describe gains, losses, and individual investments.
- Capital asset: Anything you own and use for personal or investment purposes. Examples include your home, your car, and stocks or bonds.
- Capital appreciation/depreciation: The amount by which the value of an asset increases or decreases compared to the amount you paid for it.
- Dividends: A distribution of a portion of a company’s earnings, decided by the board of directors, paid to a class of its shareholders.
- Index: A group of securities representing a particular market or industry or a portion of it. An index often serves as a benchmark for measuring investment performance– for example, the Dow Jones Industrial Average or the S&P 500 Index. An index is not managed and is not available for direct investment. However, investors are able to invest in mutual funds and exchange-traded funds that are intended to mimic the performance of the indexes. These types of vehicles enable investors to invest in securities representing broad market segments and/or the total market.
- Margin account: An account that allows you to borrow money using securities and cash held in the account as collateral.
- Prospectus: A document filed with the SEC that describes an offering of securities for sale to the public. The prospectus fully discloses the risks, policies, and fees of the offering.
- Realized capital gain/loss: Profit or loss from the sale of an asset.
- Yield: The income return on an investment. This refers to the interest or dividend received from a security based on the investment's value or purchase price. For example, an annual dividend of $1 paid on an investment worth $100 would imply an annual percentage yield of 1% ($1 divided by $100).
By taking the time to learn about the common types of investments and the language that accompanies them, you can become a smarter investor.
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Mutual Funds and Exchange-Traded Funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed, or sold, may be worth more or less than their original cost. Exchange Traded funds may yield investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched.
Wells Fargo and Company and its Affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
This information is provided for educational and illustrative purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Investing involves risk, including the possible loss of principal. Since each investor's situation is unique, you should review your specific investment objectives, risk tolerance and liquidity needs with your financial professional to help determine an appropriate investment strategy.
Investments in fixed-income securities are subject to market, interest rate, credit, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can cause a bond’s price to fall. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower-rated bonds. If sold prior to maturity, fixed-income securities are subject to market risk. All fixed-income investments may be worth less than their original cost upon redemption or maturity.
Stocks are subject to market risk, which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments in equity securities are generally more volatile than other types of securities.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets. Since such a strategy involves continuous investment, the investor should consider his or her ability to continue purchases through periods of low price levels.
Margin borrowing may not be appropriate for all investors. When you use margin, you are subject to a high degree of risk. Market conditions can magnify any potential for loss. The value of the securities you hold in your account, which will fluctuate, must be maintained above a minimum value in order for the loan to remain in good standing. If it is not, you will be required to deposit additional securities and/or cash in the account or securities in the account may be sold. Clients are not entitled to choose which securities in their accounts are sold. The sale of their pledged securities may cause clients to suffer adverse tax consequences. Clients should discuss the tax implications of pledging securities as collateral with their tax advisors. An increase in interest rates will affect the overall cost of borrowing. Margin strategies are not appropriate for retirement accounts. Please carefully review the margin agreement, which explains the terms and conditions of the margin account, including how the interest on the loan is calculated.
Dividends are not guaranteed and are subject to change or elimination.
Investment and Insurance Products are:
- Not Insured by the FDIC or Any Federal Government Agency
- Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
- Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested
Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC (WFCS) and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
WellsTrade® brokerage accounts are offered through WFCS.
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