Investments 101: How to Navigate Investment Funds, Retirement, and Trusts

A simple investments 101 crash course in terminology, structures, and retirement plans can empower you to take charge of your financial future and grow your wealth. So, we’re giving you a base-level breakdown of investment terms to help you effectively communicate financial matters.

Many first-time investors feel lost when they begin navigating the complex language of the investment world. This is natural—making informed decisions is difficult when dealing with terms you might not know. But learning the basics is easier than you think. A simple investments 101 crash course in terminology, structures, and retirement plans can empower you to take charge of your financial future and grow your wealth.

At Illinois Bank & Trust, a division of HTLF Bank, we believe investing should be accessible to everyone. So, we’re giving you a base-level breakdown of investment terms to help you effectively communicate financial matters. But before you learn the words, it’s important to understand how investing works.

How Does Investing Work?

Let’s start with the basics. Investing is the process of buying assets with the expectation that they’ll appreciate—become more valuable—over time. Ideally, it will provide returns in the form of income, capital gains or both.

Investors generally purchase these investment assets such as stocks, bonds, real estate, or mutual funds. Over time, owning these assets should turn a profit for the investor. The basic premise is buying an asset at a lower price and then selling it at a higher value.

Note that investing differs from saving, which simply stores money in an account for future use in exchange for simple interest payments.

But when it comes to saving, inflation in the economy may reduce the value of your assets over time. Careful investing, on the other hand, aims to generate enough of a return to account for inflation.

A fundamental tenant of any investments 101 course is there are no guarantees. Acknowledge the risks and proceed from an informed position.

Investments 101: General Terms

The specific language used in the investment world can seem confusing at first. However, these terms typically describe simple concepts that are easy to pick up and use. Here are ten terms to know before you start investing:

Emergency Fund

A sum held in a high-interest savings or similar account and is readily available for emergencies or unforeseen expenses.

Equities

Generally, equities are the same as stocks, which are shares of ownership in a company. They have the potential for significant growth in value over time. However, there is a risk of loss in value since the stock is tied to the value of the company. Thus, if the company’s value declines so does the value of its stock.

Liquidity

This refers to how easy it is to redeem the value of your investment or deposits. For instance, high liquidity indicates you can rapidly sell your shares, and low liquidity indicates the reverse.

Portfolio

An overarching term that describes the totality of your investment assets. The purpose of a portfolio is to manage risk and maximize returns by diversifying investments across different asset classes and sectors of the economy.

Volatility

A statistical measurement of an asset’s tendency to swing away from its mean—or average—price. Increased volatility indicates an increased risk as it describes a less predictable market.

Diversification

This means investing in a variety of different assets to reduce your overall risk. It’s a key concept for portfolio management. Dispersing risk reduces volatility.

Stocks

Another term for equities, purchasing a stock gives you a share in a company’s ownership. You profit or incur losses based on its success.

Bull Market

A period in the stock market when prices rise. Bull markets generally indicate high investor confidence and growing economic prosperity.

Bear Market

The inverse of its bull counterpart, bear markets suggest a sustained economic downturn with decreasing stock prices.

Hawkish vs Dovish

This refers to U.S. monetary policy. Hawkish policies aim to reduce inflation by raising interest rates, while dovish policies reduce interest rates to encourage economic growth.

Types of Investment Options

Next up in investments 101, let’s examine some of the most common investment structures you might want to consider when setting up your portfolio.

Mutual Funds

These are pooled sums from multiple investors. Professional money managers run them and actively use their expertise to create and manage a collective portfolio.

Exchange Traded Funds (ETFs)

These are similar to mutual funds but trade like stocks and are usually tied to an index such as the S &P 500. ETFs are designed to track the performance of an underlying index, such as a stock, bond or commodity index. They offer investors the ability to invest in a diversified portfolio of assets with lower costs and high liquidity, making them a popular investment vehicle for both individual and institutional investors.

Index Funds

Index funds are a type of mutual fund that seeks to track the performance of a specific market index, such as the S&P 500 or the Nasdaq Composite. These funds invest in the same stocks or securities as the index they track, allowing investors to gain exposure to a broad market or sector without the need for active stock picking or frequent trading. They track a collective set of stocks representing a market sector.

Hedge Funds

Hedge funds are funds managed by institutional investment managers who use a variety of non-traditional investment strategies.

Real Estate Investment Trusts (REIT)

These investment funds let you invest in a diversified portfolio of properties. REITS make the money from income generated by the real estate holdings and by the increased value of the underlying holding themselves. REIT’s may provide greater liquidity and lower risk for investors than buying property directly.

Types of Retirement Plans

Finally, let’s explore one of the most fundamental aspects of your financial future: your retirement plan options. All workers should know these investments 101 terms:

401(k) Plan

This is a traditional, employer-based retirement account where the company matches employee contributions. 401(k) plans often offer a range of investment options, such as stocks, bonds, and mutual funds, and may include employer-matching contributions.

Traditional IRA

A retirement fund that generally comes with tax-deductible contributions, although withdrawals will be taxed. Contributions made to a Traditional IRA may be tax-deductible, and the investment earnings grow tax-deferred until the funds are withdrawn in retirement.

Roth IRA

These don’t provide tax-deductible benefits for contributions. Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals are not subject to income tax or penalties

Simplified Employee Pension Plan (SEP) IRA

These have no annual contribution limits. They’re designed for self-employed people or small business owners to contribute to IRA accounts for themselves and their employees.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

This is for small businesses with fewer than 100 employees. It comes with simplified reporting and disclosure requirements and is a cost-effective option with low administrative labor.

Solo 401(k)

Solo 401(K) accounts are specifically for self-employed business owners and provide higher contribution limits than traditional, SEP and SIMPLE IRA accounts.

Investments 101: Finding the Right Financial Partner

Learning basic, investments 101 terminology, structures, and retirement plan options is the first step in taking charge of your financial future. But choosing a trustworthy wealth advisor is equally essential. You need an advisor with the deep industry experience to help you make the right moves.

Now that you’ve brushed up on your investment knowledge, you’re ready to take the next step with the established experts at Illinois Bank & Trust, a division of HTLF Bank. They’ll help you design an investment portfolio that matches your long-term goals.

After all, careful investors craft thought-out plans, and it takes a professional, trustworthy financial partner to point out the contingencies. Reach out to Illinois Bank & Trust, a division of HTLF Bank today to meet your new financial partner.

This material has been prepared for informational purposes only, and is not intended to provide and should not be relied on for investment, legal or tax advice. Products offered through Wealth Management are not FDIC Insured, are not bank guaranteed and may lose value.