The mini dictionary for novice investors

Starting out with investing is nerve-racking enough, let alone when you think that avoidable misunderstandings may crop up along the way. This is why it is a good idea to talk to other trading enthusiasts and experts. And that's why we're here! In five minutes, you'll be fully up to date with the most important terms in the world of investing.

• What is an investment?
• What is an investment horizon?
• What is a return?
• What is volatility?
• What do dividend and capital gain mean?
• What is risk when investing?
• What is an index?
• What are ETFs?
• What are shares and bonds?
• What are investment funds?
• What does diversification mean?
• What are investment costs?
• What is liquidity?
• What is asset allocation?

What is an investment?

An investment means you invest your money in the hope that your investment goes up in value. Investments come in various forms. Shares are the most well-known type, but you can also invest in ETFs, bonds, investment funds, real estate or even gold.

What is an investment horizon?

Investing is for investors who are patient. Anyone who hopes to cash in quickly and make a large profit may find it worth their while – with one exception. Most investors opt to have their investment mature in ten, twenty or even thirty years. In other words, they are investors who select a long investment horizon.

Short investment horizons, spanning a three- to five-year period to help finance a home, for example, are much less common in practice.

What is a return?

A return is what your investment yields (or may yield) over a certain period from when you start investing. This can be positive (a gain) or negative (a loss). Returns are usually expressed in percentages to allow you to better compare different types of investments.

What do dividend and capital gain mean?

Returns can be paid out in three different ways:

• Capital gains: You can sell your shares for more than you bought them for.
• Dividends: These are profit distributions paid out by companies on a regular basis.
• Yield: This is the return you receive on bonds. Buying bonds means you lend money to companies, the government and more.

Example: You buy a share for €50 and later sell it for €60. This gives you a capital gain of €10 per share. If the company also pays out €2 in dividends in the meantime, your total return would be €12 per share.

What is risk when investing?

Investing always involves a certain risk. After all, you're swapping security – money in a traditional savings account, for example – for a relatively unpredictable investment. You could achieve a good return, or your share price could fall all of a sudden and hit rock bottom.

There is always a risk attached to your investment. The higher the risk is deemed by the investment authorities, the greater the chance of significant fluctuations – both up and down.

Read more about the risks involved in investing here.

What is volatility?

Stock market prices can rise and fall. The greater the fluctuations in a price, the greater the volatility. The less volatile a price is, the more stable it will be over a certain period of time.

What are shares and bonds?

Shares and bonds are two different types of investment. When you buy shares, you are purchasing a slice of ownership in a company. If the share performs well, you will share in the profit through price rises and any dividends paid out. You have become a shareholder in the company, after all.

Bonds are loans to a company or government. In return for such a loan, you will primarily receive (coupon) interest and any capital gain. It is a very different type of investment and in principle, less risky than traditional shares.

"Investing can mean two very different things"

"Reading up on the basic terms in the investment world is definitely a good move. At the same time, it is also important to understand what investing actually means. In this sense, I think the term 'investing' can mean different things and is often used incorrectly."

"As an example, you invest in real estate to generate a fixed income on a regular basis. Yet you also invest, or play the stock market, to make your savings work for you. Ideally, you'll also receive the highest possible return, but it also comes with more rules and risks involved."

"With that in mind, it might be a good idea to offer young people in secondary education specific financial sessions on investing so they can take it into account in their plans for the future."

Geert Van Herck, Chief Strategist at Keytrade Bank

What is an index?

An index is a kind of barometer that shows how a group of companies in the index performs on the stock market. The best-known examples of indices are the NASDAQ and Dow Jones in the United States. Closer to home, we have the EURO STOXX 50 and the BEL 20. An index may include a certain number of the most valuable companies in a particular country, or the strongest companies within a given sector from a financial perspective.

What are ETFs?

An ETF (exchange-traded fund) or tracker is a ready-made basket of investments that tracks a specific index. This is an example of a passive type of investment and comes with certain advantages for novice investors:

• You diversify your assets. You automatically invest in companies in the index in question, without having to make any active decisions yourself.
• Another benefit is that ETFs aim to achieve the same return as the index they track. You therefore know your target as an investor.
• The risks and entry costs are low; liquidity is high.

What are investment funds?

An investment fund collects money from a larger group of investors and invests it in a diversified mix of shares, bonds, real estate and more. As with ETFs, the financial risks remain limited and you do not have to make any active decisions yourself.

What does diversification mean?

Diversification within an investment sphere means that you don't put all your eggs in one basket, in this case the same share. After all, if it were to go wrong, you'd lose everything in an instant. Diversification allows you to spread your resources across a range of investments:

• Different types, such as traditional shares, bonds or ETFs
• Different sectors, such as shares in technology, green energy and medicine
• Different regions, such as US (S&P 500) and Belgian (BEL 20) shares
• And more

What is asset allocation?

Asset allocation means diversifying between different types of investments, as we have explained above. You spread your investment across shares, ETFs, bonds, real estate and more, with the aim of finding the perfect balance between the lowest possible risk and the highest possible return.

What are investment costs?

You may be charged certain fees depending on the type of investment:

• Management fees for actively managing your shares or a fund
• (One-off) entry fees
• Transaction fees for executing buy or sell orders
• Stock market taxes
• And more

What is liquidity?

Liquidity represents how quick and easy it is – or isn't – to buy and sell an investment. The higher the liquidity, the faster you can claim your profits as well as limit your losses. Shares, for example, can be bought and sold quickly, even on a daily basis, while less liquid investments include real estate and art.

A brief summary

Let's get you started on your first investment strategy.

Now that you know which trading terms should always be at the forefront of your mind, it's time to take the next step in your life as an investor. Which strategies and techniques can you use as a novice investor? We've pooled all our experience to get your investment plans off to a great start.

Discover our investment strategies for beginners.