Essential Investing Terms Defined and Explained

Investing is something that we should all be doing, if we can afford to. Buying stocks is a great way to build wealth and increase your retirement savings. For active investors, day trading can be one way to make even more money (and to do so quickly — though, of course, plenty of risk is involved!). Investing is for everyone, or at least it should be.

But not everyone understands investing. Part of the problem is that the financial world is full of confusing terms. Most of us know what a stock is, but what is a “market order?” and what about a “put?”

We’re here to get rid of some of this confusion. Below, we’ll lay out some essential investing terms and explain what they mean.

stock market

Market orders and limit orders

Investing is as simple as buying stocks or other investment vehicles. You save up some money, put it in a brokerage account, and then move to buy some stocks. But then you see two options for doing so: “market orders” and “limit orders.” What do those terms mean?

A market order means that you want your order filled as soon as possible. You’ll get the best possible price, but only the best possible one right now, and you’ll complete the deal at that price even if it’s not quite the price you’d hoped for.

A limit order, on the other hand, means that you’re willing to close the deal at a certain price or better. If the market doesn’t have anyone offering the investment at that price, your order will not fill.

Market and limit orders can apply to selling stocks, too.

A market order is a quick and easy choice for buying or selling highly liquid investments. But if you’re dealing with volatile penny stocks or highly illiquid investments, stick with limit orders so that you’re better protected.

Options, calls, and puts

What is the difference between call vs put? What do these terms mean?

Calls and puts are types of options. Options contracts are deals between two investors. They stipulate that one party may (but does not have to) choose to buy an investment from (or sell an investment to — it’s one or the other, not both) the other party at a given price, in a given quantity, and within a given time frame.

A put option is the option to sell the investments. A call option is the option to buy them. Generally, buying an option is a good way to make a conservative bet on or against a given stock, while selling an option is a riskier way to do the same thing.

Mutual funds and exchange-traded funds

Funds are collections of investments. When you buy into a fund, you’re not buying an individual stock — you’re buying into the whole enterprise, the whole strategy of the fund and the collection of assets it holds. Maybe that’s because you believe in the fund manager and think that he or she can make you lots of money. Or maybe this is an “index fund,” which is a fund that just tracks a market index like the S&P 500, and you’re using the fund as a simple way to make a diverse bet on the market as a whole.

The two most popular types of funds are mutual funds and exchange-traded funds (ETFs). Mutual funds are bought into in dollar amounts and are traded once per day, after the market closes. ETFs are, as the name suggests, traded on exchanges — just like stocks. They can be bought and sold throughout the day.

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