You've Heard These Investing Terms. Here's What They Actually Mean
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Money Market vs. Savings Account

A money market account (MMA) is a bank account that typically pays a higher interest rate than checking and many savings accounts (for which the average interest rate is currently less than .50 percent). MMAs have check-writing abilities, as well as ATM or debit cards; and, like savings accounts, federal regulations restrict you to no more than six withdrawals per month. There’s usually a higher minimum balance requirement for MMAs compared to savings accounts.

Passive vs. Active Funds

Calling an investment fund “passive” or “active” refers to how it’s managed. Passive funds are run with a hands-off approach, and therefore generally come with lower fees. Index funds, for example, are set up to move in tandem with associated indices, like the S&P 500, and mirror their returns.

Active funds, on the other hand, are handled by investment managers, who attempt to beat their benchmarks by making a wider variety of investments. You’ll pay more in fees in exchange for their expertise.

Growth vs. Value Stocks

Growth or value? Both, if you want a balanced investment portfolio.

Growth stocks have a recent history of above-average performance. While all signs suggest these investments (think: newer companies, especially ones in the tech sector) will continue growing, they’re risky because you’re solely relying on the company’s success for your investment to appreciate.

Value stocks are investments that trade at a lower price than their fundamentals, like high dividend payments and company earnings, might indicate. That effectively puts these stocks in the bargain bin, and savvy investors may be able to capitalize.

Investing vs. Trading

Both investing and trading are means to the same goal: making money from the financial markets. Yet they represent different functions.

Investing typically refers to “buy and hold,” meaning investors create a balanced portfolio of stocks and bonds, and hold onto them for the long-term—gaining from the power of compound interest and weathering the natural up-and-down market cycles.

Trading, by contrast, is a much more active effort to profit, requiring a trader to frequently buy and sell investments with the aim of beating out buy-and-hold investors. It also comes with more risks.

August 30, 2016

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