12 terms every investor should know

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Are you dreaming of an investment portfolio that would be the envy of the financial hot-shots on Wall Street, but don't know where to start?

Granted, no one should discourage your investment dreams – but you can't settle for mere daydreams, either. The power to launch financial fortunes begins with knowledge, and for every acronym and bit of jargon, there's an easy explanation to boost your confidence.

Here are 12 terms from the world of finance and investing explained in simple, clear language.

Spinoff

This is when a parent company takes one of its divisions or owned properties and turns it into an independent entity. For example, eBay (ticker: EBAY) spun off its PayPal online financial services business last year, creating PayPal Holdings (PYPL). From an investment standpoint, spinoffs have a strategic value: Both the parents and spinoffs stand a strong chance of becoming more valuable after the split.

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The Fed

This is short for the Federal Reserve Bank (or Federal Reserve System). Investors watch this body closely because its board of governors sets short-term interest rates that affect how much banks charge consumers and businesses to borrow money. When interest rates rise, stocks may dip or plummet in price (often temporarily) as investors worry about how this will affect businesses in their attempts to grow by borrowing funds, or consumers trying to finance mortgages.

Market timing

This is an investment strategy where one attempts to profit by predicting stock movements as a way to buy and sell shares. Though popular with some investors, market timing gets low grades from many experts, who maintain that it's extremely difficult to do because so many unpredictable economic and financial factors affect a stock's price.

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Price-to-earnings ratio

Also known as the P/E ratio, it refers to how much investors will pay to receive $1 of a company's earnings. To calculate it, simply divide a company's share price by its earnings per share.

Beating Wall Street expectations

This refers to the forecasts analysts make regarding a company's earnings per share. These precede a company's quarterly earnings report. If earnings per share are higher than the forecasts, a company is said to "beat the Street."

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Buy and hold

This is when an investor buys a stock and holds onto it for the long term, as the name implies. Investors such as billionaire Warren Buffett have popularized this strategy.

Traditional IRA

This is an individual retirement account where you don't pay any taxes on your contributions until you withdraw the funds plus investment earnings in retirement. A chief advantage is that contributions are fully or partially tax-deductible.

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Roth IRA

This is a retirement account where you pay federal and state income taxes the year you make the contributions, but not in retirement. Its chief advantage is that contributions can grow tax-free, and you can make withdrawals without taxes and penalties after you reach age 59 1/2.

Securities

No, this isn't the blanket Linus carries around in the "Peanuts" movie and comic strips. A security is any type of investment in an intangible, including stock – thus, stock you own in a copper mine is a security, while owning the copper is not.

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Securities and Exchange Commission

Also known as the SEC, this is a government body whose purpose is to regulate securities markets and protect investors. It was created by Congress through the Securities Exchange Act of 1934 in response to investment abuses that led to the stock market crash of 1929.

Fixed annuity

An annuity is a financial product designed to accept and grow your funds, and then pay out a stream of money, usually during your retirement years. A fixed annuity guarantees that your money will accrue at a minimum interest rate. It offers a safe, predictable way to save for retirement and is considered a conservative investment.

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Variable annuity

Variable annuities invest in securities and thus provide exposure to stock market fluctuations – and the potential to earn higher interest on your payments. But unlike fixed annuities, you can lose money, though variable annuities come with varying degrees of risk.