Stock

Imagine that you own a business. If you were to divide that business up into small pieces and sell those pieces, you would essentially have issued stock, ownership in a company.

The money you raise from selling those "pieces" of your business can be used to build new plants and facilities, pay down debt, or acquire another company. A smart owner will keep at least 51% of the stock, which will allow them to retain control of the day to day activities. Any person or institution that owns over a majority of the stock is called the "controlling shareholder". Essentially, this person can do anything they want - right down to firing the CEO.

Dividend

Some stocks, especially blue chips, pay dividends. This means that for every share you own, you are paid a portion of the company's earnings. For example, for every share of AT&T you own, you will get sent $0.15 every year. Most companies pay dividends quarterly (four times a year), meaning at the end of every business quarter, the company will send a check for 1/4 of $0.15 for each share you own.

This may not seem like a lot, but when you have built your portfolio up to thousands of shares, and use those dividends to buy more stock in the company, you can make a lot of money over the years.

Blue Chip

 A "blue chip" is the nickname for a stock that is thought to be safe, in excellent financial shape and firmly entrenched as a leader in its field. Blue chips generally pay dividends and are favorably regarded by investors. A few examples of blue chips are Wal-Mart, Coca-Cola, Gillette, Berkshire Hathaway and Exxon-Mobile.

Blue chip stocks are sometimes referred to as bellwether issues.

The Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) is an index of thirty, blue chip stocks that are traded in the United States. It is believed that by looking at the companies on the list, a person can get a general picture of how the market as a whole is performing. The Dow is perhaps the most quoted and followed index in the world, and dates back to May 26, 1896. It was then comprised of 12 stocks and opened at 40.94.

The S&P 500

The Standard and Poors 500 (S&P 500) is an index made up of five hundred different stocks. Each is selected for liquidity, size, and industry. The index is weighted for market capitalization. The S&P 500 is the benchmark of the overall market, and frequently used as the standard of comparison in terms of investment performance.

The NASDAQ

The NASDAQ is an electronic exchange where stocks are traded through an automated network. It stands for National Association of Securities Dealers Automated Quotations System. As a general rule of thumb, it is where most technology stocks are traded. A quick way to tell if a company is listed on the NASDAQ is to check out the ticker symbol... those made up of four letters are listed here (e.g. Microsoft = MSFT, Dell Computers = DELL, Cisco = CSCO).

Penny Stocks

Penny Stocks are any stock that trades below $5 per share. Most financial advisors and long-term investors tend to avoid them completely because of the extremely high risk that comes with owning them. They generally tend to fluctuate wildly in price, and although some report spectacular gains in a matter of a few days [or even hours], those who invest in them are generally surprised when they disappear altogether.

Generally, if a stock is trading that low, it is danger of losing its listing with an exchange. When this happens, a company is normally either in very bad financial shape, or on the brink of bankruptcy. Smart investors opt to avoid these.

Bonds

"A Bond is simply an 'IOU' in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate."

If a business wants to expand, one of its options is to borrow money from individual investors. The company issues bonds at various interest rates and sells them to the public. Investors purchase them with the understanding that the company will pay back their original principal plus any interest that is due by a set date [this is called the "maturity"].

A bondholder is mailed a check from the company at set intervals [for example, every month] until the "loan" is paid off.

The interest a bondholder earns depends on the strength of the corporation. For example, a blue chip is more stable and has a lower risk of defaulting on its debt.

When companies such as Exxon Mobile, General Electric, etc., issue bonds, they may only pay 7% interest, while a much less stable start-up pays 10%. A general rule of thumb when investing in bonds is "the higher the interest rate, the riskier the bond."

Who can issue bonds? Governments, municipalities, a variety of institutions, and corporations. "Commercial Paper" is simply referring to bonds issued by companies.

There are many types of bonds, each having different features and characteristics. A few of the most notable are zero coupon and convertible.

Commodities

Commodities are objects that come out of the earth such as orange juice, wheat, cattle, gold and oil. People buy and sell commodities based on speculation. For instance, if you thought hurricanes over Latin America were going to destroy much of the coffee crop, you would call your commodity broker and have them purchase as much coffee as possible. If you were correct, the price of coffee would be driven up drastically because the crop had been destroyed by weather, making the surviving harvest worth more.

Almost all commodity speculators trade on margin which results in substantial risk to the invested principal. The odds are heavily against anyone hoping to build permanent wealth in the commodity markets.

Mutual Funds

Put simply, a mutual fund is a group of individual people, companies, and other organizations who pool their money together to invest. A "Fund Manager" is hired and paid to invest the cash that the investors have raised. The goal of these managers is to beat the Dow Jones Industrial Average or the S&P 500 in a fiscal year (very few funds actually achieve this.)

Money Market Accounts

A money market is more or less a mutual fund that attempts to keep its share price at $1. Professional money managers will take your cash and invest it in government t-bills (aka "treasuries"), savings bonds, certificates of deposit, and other safe and conservative short term commercial paper. They then turn around and pay you, the owner of the money market, your portion of the interest earned on those investments.

Most banks offer money market accounts to their customers, although the amount of interest paid will vary by account size. Generally, the highest interest rates are paid to those who invest $100,000 or more.

Money market accounts are frequently used to park cash between investments.