5 stock terms you should know

Even the tiniest amount of Googling will reveal an important truth: There are literally dozens and dozens of terms with which you should be familiar before you start investing in stocks. Of course, you need to start somewhere. Here are five important stock terms to get you pointed in the right direction.

Asset Allocation

The term itself kind of gives it away. Assets can be money, stocks, bonds, and property, which make up your portfolio. Allocation just means distribution. Put them together, and asset allocation simply defines how your various assets are allocated across your portfolio, e.g., how much is in stocks, how much is in bonds, etc. How this works from person to person differs depending on your financial situation.

Stocks

Stocks are straight forward. They refer to the portions of a company that an individual can purchase. Yes, this means you can purchase stock in different companies, making you an owner of sorts. Be aware, though. Purchasing stock in a booming company is expensive. Try looking at some startup companies and see if you think they have the potential to explode, like Amazon and Apple did so many years ago. As the company you hold stock in does better, the value of your shares increase.

Bonds

There are two sides to bonds. For now, we’ll focus on those who purchase them. Bonds refer to an investment made when a city, town, or county needs money to build something. The powers that be issue bonds for people to buy. Once you’ve purchased a bond, you receive interest as set by the original terms. Once the term of the bond matures, whoever issued the bond originally pays the bond holder the value of the bond.

Cash

In this context, it’s not what you think. Cash doesn’t mean a dollar note of any particular denomination found in your wallet. Cash refers to money market accounts, mixed checking and savings accounts, treasury bills (government bond), or certificates of deposit (bank paper saying you’ve deposited money for a specific amount of time) – basically any financial asset that’s relatively liquid and has an established cash value.

Prospectus

Fancy word, isn’t it? It refers to a document mandated by the Securities and Exchange Commission (SEC) that contains all pertinent information about a potential investment opportunity. Ask a financial advisor for one. If you’re planning on making any investments, this is a good read to have at your disposal.