17 Investing Vocabulary Words That Every Twentysomething Should Know

Divid-end the confusion.

Due to um, ~recent events~, it seems like everyone's talking about investments and stocks are in the air! But at the same time, a lot of us are still confused about how investing works, and TBH all the finance jargon can be tough to keep up with.

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ICYMI, last week a group of Redditors who are very into investing drove the price of GameStop's stock way up. And this action caused hedge fund investors — who were essentially betting against GameStop's stock — to lose nearly $13 billion.

Whether you're new to investing or you just want to brush up on your vocab, understanding these financial terms can help you make sense of what in the world is going on in the news — and it might even help you manage your own money too. So, let's start with a few basics:

1. Assets: Anything you buy with the expectation that you might reasonably make money from it.

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Investors commonly talk about their stocks and bonds as assets, but you might also hear this term applied to real estate, cryptocurrency, gold, or even fine art.

Assets can be "liquid," meaning easily transferable into cash like stocks, or "illiquid," meaning harder to turn into cash. A house is a good example of an illiquid asset because of the long process involved in selling.

Investors also talk a lot about asset classes. These are just groupings of similar assets that are covered by the same regulations. For example, stocks can be considered an asset class, and within that class, certain types of stocks might be grouped together within asset categories.

2. Principal: The original amount that you paid for an investment.

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For example, if you paid $50 for a stock, that's the principal.

3. Stocks: An investment that gives you a share, aka part ownership, in a company.

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When you think of investing, stocks are probably what pop into your head. Companies sell stock as a way of making money to fuel their business. When you buy stock from a company, you own what are called shares in their business, making you a shareholder.

So what's the difference between stocks and shares? Investors tend to use the word "stock" in a general sense, referring to investments in various companies, whereas they'll talk about "shares" when discussing a particular company's stock.

There are two ways to make money from stocks: either selling your shares for a profit when the stock price goes up or by earning dividends.

4. Dividends: Regular payments from a company's revenue that go out to shareholders, kinda like rewards for holding on to a stock.

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Not all stocks pay out dividends, but the ones that do can be a pretty sweet deal.

5. Bonds: Investments that earn money at a set interest rate.

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Bonds are what's called "fixed-income securities," which means you can make money on them in a predictable way. When you purchase a bond, you're essentially loaning money to a company or the government, which they repay with interest. Bonds tend to be lower-risk investments, but they also tend to be less profitable than stocks.

6. Rate of return: How much you made on an investment, expressed as a percentage.

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For a bond, the rate of return would be the interest rate that you earn. For a stock, you can calculate the rate of return by subtracting the principal (what you paid for it) from its current value — plus dividends, if applicable — then dividing that number by the principal.

In most cases, you won't buy stocks or bonds from a company directly. Instead, you'll invest through a broker, and they'll hold your portfolio of stocks and bonds in an investment account. Here are three common types of investment accounts:

7. Retirement accounts: Investment accounts meant to help people create a nest egg for the future.

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Retirement accounts like IRAs and 401(k)s often get talked about in terms of "saving for retirement," but they're actually investment accounts. A 401(k) is an employer-sponsored retirement account that's funded with pretax money taken out of your paycheck. You won't pay taxes on 401(k) contributions until you take money out in retirement.

An IRA is an individual retirement account, which you can open for yourself. There are a few different kinds of IRAs, but the most common are traditional and Roth. Traditional IRAs are usually tax-deductible, meaning you don't have to pay taxes on your contributions, so this investment could lower your tax bill. Roth IRAs, on the other hand, are funded with after-tax dollars. The neat thing about Roth IRAs is that earnings and withdrawals aren't taxed, because you've paid taxes on this money already.

If you're thinking about becoming an investor, opening a retirement account (if you haven't already) is the perfect place to start. A retirement account helps you get comfortable with investing concepts and learn about the kinds of investments that suit your needs, while also doing future-you a favor. It's kind of a win-win. However, you should keep in mind that with some of these accounts, you won't be able to touch that money until you reach age 59 1/2 without paying penalties.

8. Brokerage accounts: Your classic investment account.

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A brokerage account can hold stocks, bonds, funds, and other investments. Investors deposit funds in these accounts and then use them to buy and sell investments.

You can open one of these accounts with a fancy full-service stockbroker or take the DIY approach with an online discount broker like Webull or Robinhood. Once you've opened a brokerage account, you can transfer money into it from your checking or savings, and use it to invest in stocks and bonds.

An advantage of these accounts is that they're very liquid. You can sell shares and pull your money out any time. But be aware that the money you make in a brokerage account is considered taxable income.

9. Education accounts: These are investment accounts that help people grow funds to pay for education costs. (Think 529 plans.)

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Back in the day, 529 accounts were only available for paying for college, but they've been expanded to cover K-12 schools and apprenticeships too. Investment earnings in a 529 are not taxed as long as you use the money to cover a qualified educational expense. Parents and grandparents often open 529s when kids are young to grow a college fund for later. You can open a 529 through your state (or another state if their plans look better to you) or with an adviser.

Okay, now that you know what a stock is and a bit about investment accounts, it's time to check out a few investment vehicles, aka funds:

10. Mutual funds: Professionally managed, diverse bundles of stocks and bonds.

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A mutual fund is when a bunch of different investors pool their money together to invest in a diverse portfolio (meaning one that has lots of different kinds of stocks and bonds). Mutual funds are generally professionally managed, which means if you invest in them you don't have to spend your days watching a stock ticker. They're a little more "set it and forget it." These funds aren't traded throughout the day but instead close trades at the end of each day. Because mutual funds are so diverse, they're generally less risky than investing in individual stocks.

11. Exchange-traded funds: You can think of these as a more active sibling to the mutual fund.

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Like mutual funds, exchange-traded funds (ETFs) are diverse bundles of investments that people pool their money into. But unlike mutual funds, ETFs can be bought and sold all day long, like stocks.

12. Hedge funds: Kinda like mutual funds, but only for the wealthy.

Joe Gunn @joegunn

Me disguising myself as a hedge so that I can get funds

01:40 AM - 28 Jan 2021

Hedge funds pool investors' money like mutual funds and ETFs, but these funds are only available to accredited investors. In the US, you can qualify as an accredited investor if you have a net worth of at least $1 million or an annual income of at least $200K. So, they're very ~exclusive~.

And because hedge funds serve a wealthy group of investors who can afford to take bigger losses than the average person, they tend to make riskier investments and pursue more aggressive strategies. Sometimes this leads to the rich getting richer; but other times, it can spell big losses.

(BTW, you should know that hedge funds are the specific investments losing money due to the rise of GameStop stock.)

And here are a few more terms that you're probably hearing a lot about:

13. Capital gains and capital losses: The money you gain or lose when you sell an investment.

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You have to pay taxes on capital gains, and these are charged at different rates depending on how long you've held an investment. FYI, short-term gains, like those from investments you've held for less than a year, are taxed at a much higher rate than long-term gains.

Capital losses can be used to offset your gains and lower your tax liability.

14. Buying on margin: Borrowing money from a brokerage to buy an investment.

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When investors buy on margin, they'll put down part of the cost of the investment up front, like a down payment, then borrow the rest from their brokerage. To buy on margin, investors need to set up a margin account, and they can usually only even do this if they've already invested at least $2K.

When an investor borrows from their brokerage, the funds they've already invested become collateral on that loan. This means that if they wind up suffering losses on the investment that they borrowed to buy, the brokerage can get their money back by liquidating their other investments. It's a pretty risky move, considering the fact that investors using this strategy can lose more money than they originally borrowed. In fact, many historians and economists say that widespread margin buys influenced the stock market crash in 1929, which contributed to the Great Depression.

15. Short sale: A kind of stock transaction that seeks to profit on a stock's price going down.

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Short selling can be a very risky move. But for investors who don't mind taking on risk, it can also be very profitable. To short sell a stock, investors borrow it on margin and sell either after a predetermined amount of time has passed or when the stock reaches an agreed-upon price.

However, if the stock you're trying to short starts to go up in price instead of down (yep, like GameStop), then your broker can liquidate your other investments to pay themselves back — and there's no cap on how much you can lose.

16. Retail investor: An individual who invests in a nonprofessional capacity.

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Basically, anyone who isn't a pro-investor who has a retirement account, a brokerage account, or other investments is a retail investor. You might also sometimes see people refer to retail investors as individual investors or nonprofessional investors.

17. Day trader: An investor who tries to profit on day-to-day fluctuations in the stock market.

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Day traders are investors who actively manage their own portfolios and like to buy assets at lower prices and sell them when they go up — sometimes in the same day, as prices are always going up and down. This style of trading can be pretty risky and it takes a lot of stock market know-how to pull it off.

However, you don't have to be a day trader to invest. Plenty of investors (including yours truly) prefer a more hands-off passive investing style. In this kind of investing, people put their money in assets that they plan to hold for a long time, with a focus on long-term gains rather than short-term fluctuations.

You might also like to see what one BuzzFeeder learned when she started investing, or check out more of our personal finance posts.

And a lil' disclaimer: If you're considering making an investment, keep in mind that it does involve risk. No stock is a sure thing and you could lose money. To protect yourself, don't invest money that you're going to need anytime soon and learn everything you can about the market before you make any big moves. While it's exciting to see some people make big gains in popular investments, it's also a good idea to do your own research and make investments that suit your budget, goals, and tolerance for risk.