- A solid understanding of key investing terms will help you make better decisions about your portfolio, and help you feel confident as an investor
- Understanding the difference between a stock, a bond, and a mutual fund can help clarify how each one will help you meet your investing goals
When you don’t know the terminology, anything can seem intimidating, from skin care to birdwatching.
But as you start to pick up on the acronyms and terms people keep throwing around, you start to realize they’re not actually that complicated—they just haven’t been explained properly yet.
However, it can be much easier to put up your hand as a novice birdwatcher to ask for clarification than it can be to do the same with investing, especially when it feels like everyone already knows what a stock is.
Getting clear on the basics is a key first step when it comes investing your money, and it’ll help you be confident that you’re making the right calls for you.
So today, we’re tackling the absolute basics, very much including “What is a stock?”
In fact, let’s start there.
What Is a Stock?
A stock is a piece of ownership in a company, but while that might seem abstract when it comes to giant companies, think of it this way:
You and two friends open a cupcake business, and you want to divide the company three ways. If you incorporated, you could issue three shares of stock, each representing a third of the company. If you each owned one of those shares, you’d each own a third of the cupcake business.
Things get more complicated as companies get bigger, but at their core, stocks are still a piece of ownership in a company.
If you own Apple stock, you own a piece of Apple.
What Is a Bond?
A bond is like a loan. When you buy a bond, you’re lending your money to a company (or a government) with the expectation you’ll get it back after a certain amount of time, plus interest.
You can find bonds that last for a day, all the way up to ten years or more.
When it comes to bonds, there’s two more quick definitions you’ll need to understand as well: The coupon rate, and the maturity date.
What Is a Coupon Rate?
The coupon rate is the interest a company or government will pay in exchange for holding your money as a bond for a specific period of time. This is set before you buy the bond.
What Is a Maturity Date?
A bond’s maturity date is the date your original loan amount is set to be paid back in full. Your bond may mature in a few days, or a few years, but it’s helpful to understand what that means either way.
At Twine, rather than buying stocks or bonds directly you’ll gain access through ETFs.
This allows you to invest in multiple stocks and bonds with one low cost.
The ETF will capture the interest rate payments from the underlying bonds, and automatically reinvest in new bonds as older ones mature.
What Is an ETF?
Exchange-traded funds are commonly referred to as ETFs.
They represent a bundle of stocks, bonds, or both, all wrapped up in one investment.
That way, instead of buying 20 stocks and 20 bonds, you can buy one ETF that gives you exposure to all of those stocks and bonds—if, of course, you can find an ETF that offers that mix of stocks and bonds.
However, with the amount of ETFs available, you’ll be able to find ones that suit your goals.
Twine primarily uses ETFs because they are tax efficient, offer very competitive fees, and can be traded during the day like a stock.
What Is a Mutual Fund?
A mutual fund is a bundle of stocks and bonds that gives you exposure to multiple companies in one investment, similar to an ETF.
The biggest difference between a mutual fund and an exchange traded fund is that ETFs can be traded daily, like stocks, while mutual funds can’t.
Twine principally invests your money through ETFs, though we do use a mutual fund for money market exposure as you get closer to your goal.
What Is a Dividend?
Let’s go back to your cupcake business for a second to talk about dividends:
If you had a really great year, you might end up with extra cash from record-breaking cupcake sales, and you and your two friends need to figure out what to do with the money.
This happens to companies of all sizes, and one of the options that is commonly used by large, profitable companies is to pay a dividend.
They take the extra cash, and determine a per-share dividend amount—so every owner of the business gets some of the cash, relative to how much of the business they own.
For your cupcake business, you could divide the money by three, and pay an equal dividend to each shareholder.
You will receive dividends through the equity ETFs in your Twine account. These dividends will be automatically reinvested back into your Twine portfolio.
Building Blocks of Your Investment Portfolio
In almost all cases, your investments will be made up of a mix of the tools listed here: stocks, bonds, mutual funds, and ETFs, and you might earn additional returns through dividends.
Understanding the basics of what each one does is your best first step towards becoming a confident investor.
But it’s important to note that your portfolio doesn’t exist in a vacuum.
There are a lot of other terms that are important to know when it comes to the market as a whole, and we’ll be getting into those—not to mention how they can impact your investments—in the next lesson.
Investing 101: Let’s do this
Investing doesn’t have to be something scary and intimidating, and it’s one of the most powerful ways you can hit your goals and build wealth over the long term.
Make a Plan:
- Should I Save or Invest?
- Understanding the Stock Market
- Long-Term Investing
- The Relationship Between Risk and Return
- Investing for Beginners
- The Benefits of Diversifying Your Investments
- Types of Asset Classes
- 5 Common Investing Mistakes