Learn investing: basic investing terms

Want to learn how to invest? Then it might be useful to get to know a some investing In this article, we list the most important concepts for you, so you can tick 'investing terminology' off your to-do list.

What is investing?

Let's start from the very beginning, with the question of what investing actually is. Very simply put, investing is the act of putting your money into something with the aim of getting more money out of it after a longer period of time.

That ‘something’ can be anything. For example, you can invest in gold, real estate, bitcoins and even whisky.

What is a stock?

You can invest in all kinds of things, but stocks are the most common. You could describe a stock as a small part of a company. Not an office chair or office plant, but a piece of ownership. Or rather: proof that you are part owner of the company.

For companies, selling, or issuing, stocks is a way to raise money. The valuation of a stock is called the ‘price’. A stock price is constantly changing, depending on how well or how poorly the company is performing, how the economy is developing and how attractive investors find the company.

When you buy a stock, you pay the current purchase price in the hopes that the selling price will have risen when you eventually sell the share. In that case, your share has increased in value and you make a profit.

Of course, the price can also fall, in which case you make a loss. It's even possible to entirely lose what you've invested, for example if the company you invest in goes bankrupt.

What is a bond?

You can also invest in bonds. Investing in bonds basically means that you lend money to a company or government. In exchange, you receive an agreed amount of interest.

With a bond, you know how much interest you will receive as they are a form of fixed income security. The bond contract will state an interest rate based on a combination of inflation expectations, bond maturity and the creditworthiness of the bond issuer. This makes investing in bonds more predictable than investing in stocks. Moreover, you receive back all of the money you lent once the term of the bond has expired, otherwise known as the bond reaching maturity.

Of course, investing in bonds also involves risk. For example, the company or government to which you have lent money could go bankrupt. They might also (temporarily) not have enough money to pay the interest.

Nevertheless, bonds are generally considered to be fairly safe investments, depending of course on the type of bond you invest in.

Bonds always have a term. Sometimes these last a few years, sometimes ten or twelve. What if you don't want to sit out the entire term? Then you can sell your bond. The laws of the market apply: supply and demand means you may sell your bond at a profit, but could also do so at a loss.

What is diversified investing?

As an investor, you can buy one share or bond, or several shares and bonds from the same company. This can work out well if, for example, the company performs very well and investors are enthusiastic about it.

As you can imagine though, this can also go wrong. For example, the company's performance may disappoint, or they might even get into trouble or go bankrupt. In these case you stand to lose (a large part of) your investment.

That is why it can be smart to spread out your chances when investing. Spread investing means that you invest in many different things at the same time. If one of your investments does not go well, then the other investments can compensate for that.

Diversified investing is a commonly accepted way to lower one's risk when investing. This can affect your return: the less risk you take, the lower your potential return tends to be.

What is an ETF?

An easy way to diversify is to invest in ETFs. These are baskets of tens, hundreds or even thousands of shares and bonds. The abbreviation ‘ETF’ stands for ‘Exchange Traded Fund’.

There are many kinds of ETFs to choose from. ETFs often follow an index, or a list of selected companies or assets. An example of an index might include the top 25% most sustainable companies in a certain region. When the value of the companies in the index goes up or down, the value of the ETF changes too. 

At Peaks, we've put together ready-made investment portfolios for you. These include various ETFs, so that you can invest in a wide range of sectors.

What is an index fund?

Like an ETF, an index fund is a basket containing many shares and bonds. Index funds always track a particular index. This is sometimes the case with ETFs, but not always.

An index shows the average price of a particular group of shares or bonds. For example, the AEX index shows the average share price of the 25 largest Dutch companies.

An index fund has the same composition (as precisely as possible) as the index itself. This means that the value of the index fund closely follows the index.

So suppose you invest in an index fund that tracks the AEX index. Then the value of your investments moves in line with the AEX index.

Well-known indexes include the American S&P 500, the NASDAQ, the Dow Jones and the EURO STOXX 50.

What is a dividend?

Another investment term you may not be familiar with is dividend. You can only receive a dividend if you invest in shares. Some companies that make a profit choose to pay out part of that profit to their shareholders. That is a dividend.

Not all companies (or ETFs with shares in them) pay out dividends. And sometimes a company will pay out a dividend one year and not the next. A fast-growing company may prefer to use its profits to invest in that growth. And if a company makes little or no profit, it cannot pay out a dividend.

What is return?

The result you achieve from investing is called ‘return’. This can be either profit or loss. As you know, you can earn money through investing, but you can also lose money.

Risk and return are related to one another in a sense. If you invest in something classified as having high risk, you run a higher chance at loss. On the other hand, your potential profit is also higher. Conversely, investing in something with low risk means you usually run less chance of loss, and your potential profit is typically lower.

In theory you can also invest with a high risk and a low expected return, but that is very unattractive. Investments with a (very) low risk and a (very) high return are actually too good to be true.

What is the return-on-return effect?

If you save money in a savings account, you will (usually) receive interest on it. If you leave that interest in your account, the next time you will not only receive interest on your savings, but also on the interest you received previously.

In this way, you build up more capital in the long term – more than you deposited. This is called the return-on-return effect.

In investing, there is something similar to the interest-on-interest effect. But then it is called the return-on-return effect. The principle is the same: you earn a return on your investment and on the return you earned previously. That way, your assets can grow faster than if you were to withdraw your return immediately.

Of course, investing involves risks that you do not have when you save. For example, you can always lose (some of) your money when you invest. The costs for investing are also different from the costs you pay for a savings account. This is important to keep in mind when comparing saving and investing.

Want to learn how to invest? You now know the basics

Of course, there are plenty more investment terms to learn, but we hope you feel you've set your learning in motion with these basic investing terms. If you understand this terminology, you can already start discussing investing and discovering more about the right approach for you.

This article is intended to teach you the basic concepts of investing. You shouldn't interpret our explanation as personal advice. When using Peaks, you're always investing yourself and we give you the information you need to make your own investment choices.