Investing 101: Quiz yourself on the basics

Even if you know you should invest, choosing the right types of investments and learning all the ways to invest can seem like a real head-scratcher. So, where do you start with investing and which types of investments make the most sense for your portfolio?

Before you start building your portfolio, bolster your investment vocabulary with these essential terms.

A stock represents a small portion of ownership in a company. When you purchase a stock, you buy a tiny slice of that company's earnings and assets. Companies sell shares of stock to raise cash. Stocks sometimes earn returns, but they can also invite more risk than other investments

Read more: Are you ready to buy your first stock?

Think of a bond as an IOU from a government, municipality or corporation. The government, municipality or corporation will use your money and pay you back your initial investment, with interest.

Mutual funds , which are professionally managed investment funds, pool money from many investors. Investors can purchase a wide variety of bonds, stocks and other types of securities.

Index funds are a type of mutual fund or exchange-traded fund (ETF) that match or track a market index. For example, an index fund may follow a benchmark index, such as the S&P 500 or the Nasdaq 100. They are a popular type of investment because you can tap into a diversified bundle of stock or mutual fund choices without having to pay the extra costs associated with a mutual fund.

An exchange-traded fund (ETF) tracks an index, sector, commodity or other asset, but you can purchase or sell it on a stock exchange just like a regular stock. The benefit to this is that you can execute your trade at any time of the day when the exchanges are open — not just at the end of the day like a mutual fund.

Options are contracts that give the owner the right to buy or sell an asset at a fixed price, called the strike price, for a specific period of time. The asset may be several kinds of underlying securities.

Option trading is a method to leverage assets and control some of the risks associated with playing the market. However, options come with a risk of losing an infinite amount of money, so tread knowledgeably. 

Choosing your investments and determining which ones fit your goals, risk tolerance and time horizon is a very personal decision — so put your best foot forward by learning as much as you can about investing.

Before you invest, you should carefully review and consider the investment objectives, risks, charges and expenses of any mutual fund or exchange-traded fund (ETF) you are considering. ETF trading prices may not necessarily reflect the net asset value of the underlying securities. A mutual fund/ETF prospectus contains this and other information and can be obtained by emailing support@invest.ally.com .