When beginning investing there are many new things to learn but undoubtedly the most daunting thing to learn is the terminology. The terminology can seem like a foreign language and cause eager investors to hesitate, lose confidence and more importantly lose out on future profits. In this article we are going to discuss some of the most common terms that may be confusing to a new investor. Here are 50 terms new investors need to know.
Diversification
A risk management technique where an investor spreads their investments across different sectors and different assets is called diversification. Having investments spread out can minimize the losses that could happen if someone is invested in individual assets.
Stock
Stock is the ownership of multiple individual shares in a company. For example, if an investor owns 100 shares of XYZ Inc. it can also be said that the investor has XYZ Inc. stock.
Want to know more about Stock? Read Kashcalf’s ‘What is Stock?’
Bonds
A bond is a financial tool to ensure fixed income to the bondholder. With a bond an investor purchases the debt of a company and the company pays the investor in the form of dividends that are a recurring payment to the investor. Bonds also “mature” over time and return the principal back to the investor. Bonds are seen as a safer investment alternative to stock.
Mutual Funds
A mutual fund is exactly what it sounds like. Mutual funds are pools of money collected by multiple investors that can be invested in a wide variety of assets. Anything from stock to real estate can be invested in.
Interest
Quite simply put, interest is the charge applied from the lender to the borrower for borrowing money. There are two types of interest, simple interest and compound interest. Simple interest is a fixed rate through the life of the loan. Compound interest is the interest on the principle and the compounding interest paid on the loan.
Exchange Traded Funds (ETF)
Exchange Traded Funds are funds that normally follow an index or a particular sector. Think of them like baskets that can hold a wide variety of securities. ETF’s are very similar to mutual funds but unlike mutual funds which are traded once a day, ETF’s are traded like stock throughout the entire day.
Annuities
Annuities are a financial vehicle typically used by retirees to provide a steady stream of income. Their main goal is to ensure that people do not outlive their savings. Investors either pay all at once or pay in increments. Once the annuity is fully vested then the investor can begin to pull money from it.
Index Funds
Index funds are mutual funds or exchange traded funds that track an index. Examples of which are index funds that are designed to mimic the movement of the Standard and Poor’s 500 (S&P500). Index funds are not actively managed so they do not incur the same expenses and fees as actively managed funds. Index funds are invested across the shares of several companies. This inherent diversification provides safety that individual stocks cannot.
Cash
Cash is the legal tender of a nation or government entity. It can be exchanged for goods and services. For corporations it refers to assets, bonds, bank accounts or any other holdings that can immediately be turned into cash.
Price-Earnings Ratio
Price-Earnings ratio is one calculation used to determine if a company’s stock is overvalued or undervalued. It is calculated by dividing the company’s share price by their earnings per share.
Expense Ratio
Expense ratios calculate how much of a mutual fund’s assets are used for operating and management expenses. It is determined by dividing the total costs by the total assets.
Prospectus
A prospectus is a document that is filed with the Securities and Exchange Commission (SEC) by companies that provides investors with insight into a company’s functioning. A prospectus consists of financial statements, information about directors and their compensation, and most other information about the company.
Bear Market
A market that is experiencing prolonged declines is referred to as a bear market. These prolonged declines are typically seen as a 20% reduction from previous highs. This causes pessimism among investors. These investors can pull their money from the market altogether causing the market to spiral further downward.
Bull Market
A bull market or a market that is simply referred to as “bullish”, is a market that is experiencing a rise or is expected to rise. This typically gets investors excited about the markets and as a result gets more investors trading, putting more money into the market.
Capital
Capital is a word most often used to describe an individual’s or company’s financial assets. Companies refer to this as business capital. They are made up of working capital, equity capital, and debt capital.
Asset
An asset is anything of monetary value that is owned by an individual or a corporation that can be sold for cash. Examples of assets are stock, bonds, real estate, materials, vehicles, collectibles, pensions, retirement plans and life insurance policies.
Asset Allocation
Asset Allocation is an investment strategy designed to balance risk and reward within an investor’s portfolio. It is determined by the investor’s risk tolerance, and time that the investor predicts having the security. That period of time is called an investment horizon.
Balance Sheet
A balance sheet is a financial document that shows a company’s liabilities, assets and its shareholder’s equity. This is one of three core financial statements used to evaluate a company.
Share
A share is the smallest unit of ownership in a company. Stock in a company is broken down into individual shares. For example, an investor can have XYZ Inc. stock. The number of shares (let’s say 100) make up the investor’s ownership in XYZ Inc. stock.
Market Capitalization
Market Capitalization is how much a company is worth on the market. It is calculated by multiplying the price per share by the number of shares in the market. Companies are divided by large-cap, mid-cap, and small-cap.
Short Sell
A short sale is an investment technique where an investor borrows shares at one price and sells them hoping that the price drops and they can buy them back at a lower price later. This method is highly speculative and highly risky. Like with anything that is highly risky it also has the chance to be highly lucrative. Short selling should really only be done by experienced traders.
Dividends
Dividends are a payout from companies to their shareholders. They are typically paid quarterly from a company’s profits. Dividends can be paid in the form of cash or additional shares.
Shareholder
An individual who owns shares in a company is referred to as a shareholder. Shareholders are essentially passive business owners who have no control over the direct day to day operations but can have limited control (depending on the number of shares they own) over the company’s management. Like all business owners, shareholders will benefit from a company’s success and suffer from a company’s failures.
Dividend Yield
A dividend yield is the annual percentage of a company’s share price that is paid to its shareholders. It is calculated by dividing the annual dividend per share by the current price per share.
Yield
Yield is the net profit recovered from an investment. It can be anything from interest to dividends received from the investment. It can be calculated as such:
Yield = Net profit from investment / investment principal
Volume
The number of shares of a company that change hands over the course of a day of trading is called volume. Volume can help indicate a general level of interest in a stock. That interest can be either positive or negative.
Volatility
Volatility is the degree to which a stock price will change over a period of time. Stocks that fluctuate often are considered more volatile and thus deemed riskier investments than less volatile stocks. Though these riskier investments are dangerous to an investor’s portfolio they also offer quicker gains if everything turns out in the investor’s favor. Basically it is a big risk, big reward option. Stocks with less volatility are safer choices and offer less opportunity for massive gains but offer more stability over the long haul.
Valuation
The process of determining an investment’s current or future value is called valuation. Both companies and assets can be evaluated this way. There are a wide variety of valuation methods that range in complexity and relevance to any given stock or sector, so be sure to use this in congruence with other analytics.
Sector
A group of related businesses that provide similar products and services is called a sector. The market is divided into sectors, 11 sectors to be precise. They are technology, utilities, financials, real estate, consumer discretionary, consumer staples, energy, healthcare, materials, telecommunications, and industrials.
Risk Tolerance
Risk tolerance is the level of market volatility that an individual investor is comfortable with. It is a way to judge the style of the investor. They are typically categorized by aggressive, moderate, and conservative.
Recession
A recession is an overall decline in economic activity. It is generally accepted as two consecutive quarters of steady decline in the gross domestic product (GDP).
Inflation
An overall increase in the price of goods and services. As a result this also causes an overall drop in the value of currency. This is generally good for individuals holding assets and bad for individuals holding cash.
Initial Public Offering (IPO)
This is the process of offering shares of a private company to the public. This is also referred to as “Going Public”. The company sells shares and raises large amounts of capital from public investors for investment in operations and expansion.
Ask Price
The ask price is the lowest price that would be accepted by the seller for shares of stock.
Bid Price
The bid price is the highest price that a buyer will pay to the seller for shares of stock. The difference between the ask price and the bid price is called the “spread”.
Broker
A broker is a person or firm who buys or sells assets for a fee or commission on behalf of other people.
Blue Chip Stock
Blue Chip stock are considered the best of the best. They are known as reliable and stable stocks from well respected industry leaders. Many blue chip stocks also provide dividends to their shareholders.
Earnings Per Share (EPS)
Simply put, earnings per share is a company’s net earnings divided by the number of its outstanding shares. For example, if a company has $10 million in earnings and has 5 million outstanding shares the earnings per share is $2.00 per share.
Liquidity
Liquidity refers to how quickly and conveniently an individual’s or business’ assets can be converted into cash without affecting the market price. Cash is obviously the most liquid of all assets. There are two main types of liquidity, market liquidity and accounting liquidity.
Dividend Reinvestment Plan (DRIP)
A Dividend Reinvestment Plan or DRIP is a program that allows investors to reinvest their dividend back into the company they got the dividend from in the form of whole or fractional shares. A DRIP can be one of the easiest ways to increase your holdings over time. These are normally used by younger investors who have time to let their investment mature.
Alpha
A term used to measure performance. Alpha is when an investment strategy, trader, broker or portfolio manager has outperformed the market during a given period of time. Alpha is the result of active investing.
Beta
Beta is a term used to measure stock or portfolio volatility and systematic risk compared to the market as a whole. This helps investors gauge how much risk their portfolio has and how much they want.
Commodities
Commodities are basic goods that differ little between providers. Examples of such commodities are oil, grains, beef, natural gas and gold. Commodities are important to investors as they help diversify a portfolio outside of the traditional securities. Commodities also often withstand market volatility better than stocks.
S&P 500
The Standard and Poor’s 500 or the S&P 500 as it is more commonly called is a stock market index of 500 companies in the United States. Similar to the Dow Jones, it uses a fixed number of companies to determine the overall direction of the market.
Nasdaq
Starting on February 8th, 1971, The Nasdaq is a global market based in the United States where securities are traded. It is the world second largest stock market behind the New York Stock Exchange.
New Your Stock Exchange (NYSE)
Formed in the late 18th century, the New York Stock Exchange is the largest stock exchange in the world today. Nicknamed “the big board” this is the most widely traded on stock exchange.
Portfolio
A portfolio is a collection of financial investments held by investment firms, financial institutions, hedge funds or individuals. These holdings are in the form of stock, bonds, real estate, cash, mutual funds, exchange traded funds, collectibles, money market accounts and private investments to name just a few.
Capital Gain or Loss
Either the financial gain or loss from the selling of an asset such as stock, bonds or real estate. Capital Gains is susceptible to capital gains tax, which is a tax levied upon the positive difference between the purchase price of an asset and the sale price of that asset.
Equity
Equity is the amount of money that would be returned to a shareholder if a company liquidated all of its assets and paid off all of its debt.
Income Statement
A financial statement from a company that summarizes their profitability over a predetermined period of time, either quarterly or annually. Also referred to as a ‘profit and loss statement’, this is one of three core financial statements used to evaluate a company.
Conclusion
We hope this article has been useful and informative for you. While this is by no means the end of the terminology lesson, “50 terms new investors need to know” should provide you a great starting off point to begin to navigate the investing world. Let your journey begin!