8 Investing Terms Everyone Should Know
Investing can seem complicated, and we understand that! To help shed some light on various terms and concepts in the investing world, we’ve put together a quick guide to common phrases you may hear when talking about investing. Scroll on to learn more!
1. ETF
stands for “exchange-traded fund” and is a type of security that represents a basket of investments but trades similar to an individual stock.
ETFs track an index, sector, commodity, or other assets and similar to mutual funds, it's a basket of securities. However, given that the underlying assets don't change as frequently as a mutual fund, there are generally lower expense ratios for ETFs. Since the majority of ETFs simply track an index or sector, the fund company is able to save on analyst labor cost which is then passed on to investors in the form of a lower expense ratio.
2. MUTUAL FUND
A mutual fund is a company that pools money from investors to invest in securities such as stocks and bonds, as such is a basket of securities.
Professional money managers actively manage these funds to select which securities to invest in. Given this active hands-on management, mutual funds tend to charge higher annual fees known as “expense ratios” and share class load charges.
3. TAX LOSS HARVESTING
Tax-Loss Harvesting refers to the selling of securities that are at a loss so that you can offset capital gains.
A security is at a loss if the current fair market value is less than what you purchased it for, also known as cost basis. These losses can then offset realized capital gains. If an investor end the year with more capital losses than capital gains, the IRS allows you to claim a loss of $3,000 net each year, and any additional loss is rolled over to future tax years.
When tax-loss harvesting, it is important to be careful of wash rules. The wash-sale rule is a tax rule that prevents taxpayers from claiming a capital loss on a security if they buy a "substantially identical" security within 30 days before or after selling the original security. Its primary purpose is to discourage investors from selling securities at a loss simply to claim a tax benefit. If a wash sale occurs, the loss deduction is disallowed, and the loss is added to the cost basis of the repurchased security.
4. PASSIVE INVESTING
A “buy-and-hold” investment strategy that focuses on long-term investment, which means minimal buying and selling. In order to be successful with this strategy, the investor needs to separate themselves from the emotional ups and downs of the market and instead let the portfolio continue to stay invested in all conditions.
5. ACTIVE INVESTING
Counter to passive investing is active investing, which is an ideal strategy for those who aim to outperform the market with constant monitoring of the market and frequent tactical allocations to optimize portfolio construction to match economic conditions.
Active investing requires much more effort than passive investing, as it requires constant vigilance of economic conditions to translate those changes into portfolio construction.
6. MONEY MARKET ACCOUNTS
Act like a hybrid checking account and savings account
Offer some limited abilities to conduct debit transactions
Offer higher interest savings than traditional checking accounts. (The interest savings are commonly in line with the savings accounts noted above.)
Generally FDIC insured so they are “low risk”
7. MONEY MARKET FUND
A type of mutual fund held within a brokerage account
Uses very short-term bonds (generally one-year bonds or less) to generate interest for the investor
Matured bonds are rolled over into the next set that rinse and repeat, paying interest to their investors
Not generally FDIC insured so they carry some risk
8. DOLLAR COST AVERAGING
Dollar cost averaging is a strategy by which you systematically invest equal amounts, spaced out over a set period of time—regardless of price.
The goal is to reduce the impact of price volatility and average out your cost basis (price at which the shares were purchased) over the defined period. The hope is that you avoid a one-time lump sum investment that is poorly timed in regards to the assets pricing.
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Past performance is not indicative of future returns, and investing always carries inherent risks, including the potential loss of principal capital. Any investment strategies are specific to individual clients and may not be representative of the experiences of all clients.