Investing Basics
What is an "investment"?
An investment is the process of taking your individual capital, usually money in the case we're thinking about here, and doing something with it. An investment is made in the hope that it'll grow in the future to provide for some future goal. Many times an investment can be just buying a piece of real estate, or a stock or bond. An investment can be made in any different type of asset with the expectation that it's going to grow over time to provide you with more money than when you started.
What is an "investment portfolio"?
An investment portfolio is the group of investments that an individual or a family may have. It's all their different investments together that creates that portfolio, be it real estate, stocks, bonds, commodities, etc. All of it together creates an investment portfolio.
What is a "stock"?
A stock simply represents ownership in a company. If you own shares or stock in xyz company, you're actually the owner of that company. That share of stock also gives you some voting rights to help control how that company operates.
What is a "bond"?
A bond, in its simplest form, is a debt instrument, where you have lent money to a company or a government and they pay you back interest for the use of your money.
What is a "mutual fund"?
A mutual fund is a pool of investment where there are many different individuals who pool their money together into a product that generally has professional management. They will then go out and purchase bonds or stocks, or whatever the goal of that mutual fund is to do.
What is a "dividend"?
A dividend is really a profit that is paid to the owner of a company. If you own stock of a company, and that company has a profit, the company has an option of either keeping the profits within the company or distributing those profits to the owners. In a public company where there are shareholders, if they distribute their profit to the owners, that would be called a dividend.
Do all companies pay dividends?
Whether or not a company pays a dividend is at the decision of a company. Many companies don't pay dividends, and they take their profits and really invest them back into the company to try to grow the company more. There are some other companies that really want to distribute their profits to their shareholders and do so through dividends.
What is a "treasury note"?
A treasury note is a bond issued by the US government. There's really three types of treasury notes that are bonds. There's the Treasury Notes that are referred to as "T-Notes" that have a maturity between one and ten years. There's Treasury Bonds, called "T-Bonds", which have maturities greater than ten years. Finally, there's Treasury Bills, or "T-Bills", which are going to have a maturity of less than a year.
What is an "asset class"?
An asset class represents a group of securities that have similar price movements. What I mean by these securities, and a security can be a stock, a bond, or a real estate portfolio, but these individual securities are going to react to market conditions in the same way. So their prices are going to go up and down together, and so you can group them all together because they're going to have the same kind of risk reward characteristics, and that's going to create an asset class. Classic examples of asset classes have been stocks, bonds, cash, and real estate. There's more advanced definitions now such as a Large-Cap Growth Stock or a high-risk bond, but these are more specific asset classes.
What is "asset allocation"?
Asset allocation is really the process of trying to manage the individual risk of an asset class. To the extent that an asset class is securities with similar price movements, the goal of asset allocation would be to take different asset classes that have dissimilar price movements with each other so that if one asset class is going up, another one might be going down. That is really decreasing the risk of any individual asset class. The classic example of asset allocation would really be the allocation between stocks, bonds and cash in a portfolio where you might have 5% in cash and 2% in bonds and 75% in stocks.
