It is my opinion that finance terminologies are crazy over complicated for what they are and the system and people working for it make more difficult than what they are for x reason... Here are some good terms anyone into finance should know.
Stock and Bonds
Stocks will outperform over the long term
From Buffett: It's been idiotic to buy long bonds
| Stocks | Bonds |
|---|---|
| Makes you an owner |
Makes you a lender |
| You claim part of a company's assets + earnings |
You earn interest |
| No guarantee to get money back | Payment due to you on date of maturity |
Index Fund vs ETF vs Mutual Fund
Index Funds are a type of Mutual Funds
All index funds are mutual funds, but not all mutual funds are index funds
Chronological order of creation: Mutual Fund -> Index Fund -> ETF
| Index Fund | ETF (Exchanged-Traded Funds) | Mutual Fund |
|---|---|---|
| You can own multiple stocks by buying 1 index fund You can only buy shares once a day |
You can own multiple stocks by buying 1 index fund You can buy/sell shares whenever the stock market is open ETF is not really a stock but you can buy as if it were a stock It trades like a stock so you can watch it go up and down, so it's added temptation to sell, not a good long term strategy |
You can own multiple stocks by buying 1 mutual fund |
| Diversification | Diversification (90 stocks at a minimum) | |
| Passive managed, which eliminates the need for active management. For example the S&P 500 Index. Since this index fund only buys whatever index it's on there, and you're not paying someone to oversee it, the fees are much much lower as 0.04% |
Same as Index Fund |
Managed by investment professionals They charge fees (called active management) |
| Automatic reinvestment from your checking account | Not Automatic investment |
