Learning something new can be intimidating. Not only are there new concepts to wrap your head around, but new lingo to go with it. The investing world is no different!
Whether it be a new company, hobby, or even a course, it can almost seem as if a new dictionary of words and acronyms exist.
Personally, I find the acronyms the hardest part. I’ve worked for several companies now, and it seems like each one has its own language!
In my early years, I interned at one firm for four months. There were so many acronyms that a 3-page list of terms was created by a co-worker and was passed from new intern to new intern. We called it “The Keys to Life.” I shamelessly brought it to meetings to keep up!
The investing world is no different. It has its own set of terms that you often learn with experience.
To build your confidence as an investor, I’ve outlined some of the most popular (and useful) investment terms below. Take a peak, and get acquainted with them. After reading this, you’ll know what they are, and why they’re essential.
General Investment Terms
This is short-form for the word “stock exchange” and is where stockbrokers buy and sell shares of investments. Exchanges were once physical locations, and trades were done person-to-person. But today trading relies heavily on digital tools.
Each exchange still has a physical place, kept for record keeping, but a lot of activity is done in a computer terminal. Two of the most popular exchanges in the world live in New York – the New York Stock Exchange (NYSE) and the NASDAQ.
In the finance world, an index is an indicator of how well stocks are doing. You bundle several stocks together and track their performance.
One of the most famous examples is the S&P 500 Index. It follows 500 large companies that trade on either the New York Stock Exchange (NYSE) or NASDAQ Exchange.
It’s important to note you cannot directly invest in an index. It’s just an indicator of how well stocks are performing.
Dividends are how stocks produce income for it owners (or shareholders).
When a business makes a profit, they can do two things with it – give it to shareholders, or reinvest it into the business. When you pass profits back to shareholders, it produces a dividend. At a specific date, the company agrees to pay out a sum of money – each share is given an equal proportion.
Many people don’t think of dividend when they think of how you can make money from stocks. Instead, most people jump to the idea that you earn money from stocks as they appreciate in value. The problem with this is you lose sight of a VERY big component of overall performance.
Dividends are a great way to produce regular income, and chosen by a long of big-time investors! Check out a related post to learn more!
Related post: The gems of the stock market – dividend growth stocks
This term stands for “Market Capitalization” and is a fancy way of describing the size of the business. The higher the market cap, the bigger the company.
Generally, large-cap stocks are less volatile than small-cap stocks because there’s no shortage of buyers and sellers. With big companies, you’re never stuck holding onto your investment trying to find a buyer (which is good news for you!)
Types of Investments
When you see videos of stockbrokers buying and selling “stock” this is often what they’re trading.
Buying a share of common stock gives you a piece of ownership in a company. As an owner, you’ll make money as the price of shares going up (called capital appreciation) or through a return of profits to you in cash (called dividends).
A bond represents loaned money to a company. When you become a bond-owner, you collect interest payments for loaning out that money.
The interest rate charged varies based on how risky the borrower is. If you don’t want to buy bonds individually, you can also own them through a bond fund, which spreads out the risk you may have. With this method, instead of going “all-in” with one company, you can have ownership of several types of bonds.
Blue Chip Stocks
These types of stocks are typically well-established industry-leading companies. They usually have a track record of paying dividends for decades. Because of this, their stock price doesn’t jump around often, and they’re typically lower risk in nature.
Where does the name come from?
Believe it or not, the name comes from poker where the blue chips have the highest value.
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A mutual fund is an investment where investors pool their money and give it to an adviser to invest it. All the gains or losses from the investments are shared among the group.
As an investor, you enjoy access to many types of investments and advice from a professional. Of course, that advice is not free. You will owe a percentage of your portfolio to the mutual fund manager for doing the work (anywhere between 1-2%).
Mutual funds are an excellent way to buy different kinds of investments, without having to shell out tons of money. These investments could be anything (bonds, stocks, etc.).
This acronym stands for “Exchange Traded Fund.” It has similarities to both a stock and mutual fund.
Firstly, like a stock, it can be bought and sold on an exchange at any point throughout the day. The benefit of this is that you can buy into it or sell quickly and easily with very few fees to worry about.
Secondly, it acts like a mutual fund as it’s a basket of investments rather than one stock. This helps to reduce your overall risk vs. owning an individual stock.
What makes it interesting though is it’s not managed by a person. Instead, ETFs are set to follow an Index and trade based on logic. There’s no human decision on when to buy and sell. Once you build the allocation of what stocks to purchase, and how much, it does all the work for you. Because there’s limited human interaction, the costs to buy and hold these are much lower than mutual funds.
This term describes the return dividends produce for you. They’re often stated in a percentage, based on the initial cost of the investment.
For example, let’s say you earned $1.50 in dividends a year from a stock that cost you $100. That means that stock is earning you a 1.5% dividend yield.
Yields are important because they describe how much income you’re collecting from your investment. A word of caution though – a higher dividend does not always mean it’s a better investment… there are lots of other considerations to think through! Here’s a good article to help explain more: 3 Reasons High-Yield Dividend Stocks Can Be Dangerous (The Motley Fool).
Like real-life, leverage is a process to “make something easier.”
Finance people use leverage to magnify their returns. The most common example is borrowing to invest. By using someone else’s money, they hope to profit from it.
As you can imagine, it’s a very risky process. Yes, you can gain, but you also can lose a lot! If you can make a high enough return to pay back the lender and put money in your pocket, then great! But if you lose money on your investment, you get hit with a double-whammy, owing to the lender and having negative equity for yourself.
This term stands for “price-earnings ratio.” It’s one of the most used numbers to help value a stock. It tells you how much money you are paying for $1 of the company’s profits.
The lower the P/E ratio, the “cheaper” the stock. And a low ratio can often be a good sign that a stock is a solid buy.
Do your research though! You’ll need to compare this to historical numbers and competitors in the same industry. You want to make sure it’s valued fairly across more than one metric.
Think it through
- What concepts intrigue you that you’d like to learn more about?
- What can you do to start learning more about investing?
- What’s preventing you from investing (or investing more!) today?
- The gems of the stock market – dividend growth stocks
- Don’t be a distracted investor – learn how to drown out investing noise
- The best way to invest is to think differently
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