Stocks and bonds could probably be considered the basic building blocks of an investment portfolio, and you’ve most likely heard of them before. But beyond just these two basic terms there is a whole world of investment opportunities, and sometimes the financial world seems to have a language of its own. Fortunately though, there are many resources available to help you understand what it all means.
To get you started, let’s discuss a few of the most common terms you might hear and what they mean to you. Asset Class – a term used for categorizing different types of investments. There are basically three asset classes: stocks, bonds and cash. Asset Allocation – the process of selecting and blending investments from different asset categories to reduce investment risk and reach long-term investment goals. This refers to how much of your money you put into stocks, bonds and cash equivalents (such as checking accounts, money market funds and CDs).
Proper allocation keeps your money spread over different types of investments, so if one particular type is struggling, the other types could still be doing well. Although it will diversify your portfolio, asset allocation does not protect against fluctuating markets or uncertain returns. Diversification – the process of deciding what mix of investments to own within each asset category. After you have determined the proper asset allocation for your investments, diversification helps you spread your investments out even further. Owning stock in companies from a wide variety of industries, for example, puts you in position to see possible benefits from moves in different sectors of the economy.
Dividend – when a company decides to share profits with investors, it usually pays a dividend to stockholders. The company’s board of directors decides when these payments are made, and how much they’ll be, but typically dividends are paid on a quarterly basis in the form of cash or additional stock in the company.
Commodity – as opposed to stocks and bonds, which are simply valuable pieces of paper, these can include tangible products that are traded on an authorized commodity exchange. There are many different types of commodities, including agricultural products, metals, and petroleum. Foreign currencies and financial instruments and indexes can also be considered commodities. Hopefully now you have a little better understanding of some of the basic terms associated with investments. In addition to knowing about these options, it may be helpful to know where you can find some of these investment vehicles. Rather than just going out and searching, there are many markets and systems set up to help investors with the process of buying and selling: Exchange – a system for the organized trading of securities.
There are several major exchanges in the United States, including the New York Stock Exchange, American Stock Exchange and Chicago Board Options Exchange. Several regional exchanges throughout the country also trade securities.
Over-the-counter (OTC) – a highly sophisticated communications network on which dealers trade securities that are not listed on any exchange. All government bonds and all other nonlisted stocks and bonds are traded on the OTC network.
Nasdaq – an electronic information network that provides brokers and dealers with current price quotations on many actively traded over-the-counter securities.
While understanding these terms should help give you a good start, there is plenty more to learn about the world of investments. Another great way to educate yourself is to speak with someone who is well versed in the language. A Financial Advisor can take the time to explain what everything means, and help you make decisions about how to meet your own personal needs.
This article was written by Wells Fargo Advisors and provided courtesy of Chukwudi Charles Oje in Manhattan Beach at 310-725-2267.
[Disclosures] [PCG / ISG:] Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.
