Financial literacy is essential in today’s world. Most of us are partially, if not entirely, responsible for our upcoming retirement. It takes some knowledge to successfully plan, invest, and manage your finances for that day. Understanding basic investing jargon is the first step in gaining the necessary knowledge. You’ll frequently hear about them in the news or read about them on financial websites. Understanding these terms is essential if you’re a DIY investor. How else will you be able to invest your money profitably and wisely? The most frequent investing jargon that everyone should understand is listed below.
A stock also referred to as a share, is a type of financial security that signifies a stake in a business. For instance, if you buy stock in McDonald’s or Amazon, you move into the minority of shareholders. That implies that you hold a financial interest in the company. Your share of the profits, if the company is profitable, will depend on how much stock you own.
Stock Exchange/Stock Market
Shares of publicly traded companies can be purchased, sold, and issued on the stock market. The terms “stock market” and “stock exchange” are frequently used interchangeably. There are stock markets in every country on earth. The New York Stock Exchange (US), the Toronto Stock Exchange (Canada), the London Stock Exchange (U.K.), and the Tokyo Stock Exchange are some of the biggest and most well-known stock markets (Japan).
An organization or person who buys and sells stocks on behalf of clients or customers is known as a stockbroker. Stockbrokers settle trades and ensure that money or securities reach their clients securely and within a predetermined time frame. Through online and discount brokerages, many people buy and sell stocks on their own. So you can start investing without using a stockbroker. In addition, through programs like dividend reinvestment plans or dividend reinvestment programs (DRIPs), it is possible to buy stock without using a broker.
Dow Jones Industrial Average (DJIA)
The most well-known and widely used indicator of the US stock market is the Dow Jones Industrial Average. A price-weighted list of 30 actively traded blue-chip companies makes up this list. Investors use the Dow Jones index as a barometer (or indicator) of the state and trend of the stock market.
There are two additional key indices to follow. Similar to the Dow Jones is the NASDAQ Composite and the S&P 500. The strength (or weaknesses) of these three stock indexes can provide a quick snapshot of the state of the economy.
A “bull market” is when most stock prices increase over a period of weeks, months, or years. Your current investments will increase in value during a bull market, which is great. Similarly to this, someone is said to be “bullish” on a stock if they are enthusiastic about it.
A bear market is the opposite of a bull market. A “bear market” is one in which stock prices decline over a period of weeks, months, or years. While this is bad for your current investments, it typically presents a great opportunity to buy stocks at a discount before they recover. Those with a negative view of stock are referred to as being “bearish” about it.
Blue Chip Company
A term of praise is “blue chip company.” A blue chip company has a track record of reliable earnings, consistent dividend payments that are continuously increasing, and a spotless balance sheet. When it comes to a reliable return on your investments, think of them as the closest thing to a sure thing.
A company’s market capitalization is its value as a publicly traded entity. It is calculated by multiplying the total number of outstanding shares of a company’s stock by the stock price at the time. For instance, Tesla’s market capitalization recently surpassed the $100 billion threshold when its stock price rose.
Price-to-Earnings Ratio (PE)
With current profits and no growth, the price-to-earnings (PE) ratio estimates the years it would take for a company to recoup its purchase price per share from after-tax profits. In other words, the PE ratio informs you of the company’s cost per $1 of earnings. The PE ratio is 10 if a company reports earnings of $1 per share and the stock is trading for $10 per share ($10 per share divided by $1 per share equals earnings of 10). Traders frequently use the price-to-earnings ratio to determine whether a particular stock is undervalued or overvalued.
A bond is a fixed-income instrument that represents a shareholder’s loan to a borrower, usually a government or corporate entity. Companies and governments use bonds to finance major initiatives and ongoing operations. Owners of bonds are the issuer’s creditors or debt holders.
Government-issued bonds are thought to be the safest and most secure kind. Every bond typically has a borrower, a municipality, or the federal government, that is required to make fixed interest payments on specific dates. Bonds are generally more stable than stocks. While stocks are traded on a stock exchange daily, the value of bonds is much less subject to large swings.
A collection of stocks or bonds pooled together is known as a mutual fund. Mutual funds are typically managed by a qualified individual who works for a bank or investment firm. The fund manager chooses the stocks or bonds held within the mutual fund. Investors buy mutual fund units, which contain specific stocks or bonds. During the day, mutual funds are not traded on a stock exchange. Instead, buy and sell orders are gathered all day long. They are carried out after the markets have closed.
Mutual funds and exchange-traded funds (also known as ETFs) are very similar. The distinction is that the latter trade continuously on stock exchanges like real stocks do throughout the day. Many ETFs or “index funds” track a specific stock market or index, like the S&P 500 or the Toronto Stock Exchange (TSX). ETFs may offer tax benefits, just like mutual funds. ETFs typically have lower fees than mutual funds do, though. This is due to the fact that experts do not manage most ETFs. ETFs are referred to as passive investing as a result.
A specific kind of investment partnership is a hedge fund. Hedge funds typically pool capital from partners or investors and carry out various investing activities. Investments made by hedge funds are frequently riskier than those made by regular investors. Because of this, government regulations are used to limit who can invest in a hedge fund, protecting people and their money.
To join a hedge fund, you typically need a certain minimum amount of cash—often $1 million or more. Here’s a helpful way to consider it. Anyone can invest money in a mutual fund, but the investments that can be made with that money are constrained. On the other hand, a hedge fund is free to invest in almost anything, but it restricts who can contribute money.
Real Estate Investment Trusts
Investors frequently use real estate investment trusts (REITs) to invest in real estate. A REIT has special tax treatment and trades on a stock exchange like a stock. Different kinds of REITs with different real estate specializations exist. You might think about investing in a hotel REIT, for instance, if you want to invest in hotel-related real estate. They allow you to make real estate investments without acquiring and caring for a building or piece of land. Plus, some REITs allow you to invest in undeveloped land.
Dividends are sums of money publicly traded companies regularly pay their shareholders out of their profits. There aren’t any dividends if the company is losing money. They can be paid either quarterly or monthly, with the latter being the more typical option.
Companies may also elect to distribute dividends to shareholders on an annual basis or on occasion. The term “income” for shareholders often refers to dividends. They receive a per-share payment, such as $0.30 per share. The dividend payments you receive will increase as your share count increases.
The percentage of a stock’s value that the company distributes to shareholders is referred to as the dividend yield. For instance, a company that pays a 3% dividend yield and has a stock price of $50 per share might distribute $1.50 in dividends to its shareholders.
A raw material or agricultural product bought and sold on an exchange is referred to as a commodity. Commodities include agricultural products like coffee, wheat, or soybeans to precious metals like gold, silver, and copper. Some exchanges focus primarily (though not exclusively) on trading commodities, such as the Chicago Mercantile Exchange.
The various investment categories you can hold, including stocks, bonds, ETFs, REITs, and commodities, are referred to as your asset allocation. It also describes how you distribute your funds among various investments or assets. One is said to be “diversified” if one owns a wide variety of investments. If you invest all of your money in a single stock, you haven’t allocated your resources well.
The highest obligation owed to another person is called a fiduciary duty in most western legal systems, including those in the US and Canada. Fiduciary responsibility in the context of investing means that publicly traded companies must prioritize the interests of their shareholders over their own. This frequently entails disclosing potential legal issues or conflicts of interest.
Buying on Margin
Borrowing money to invest is known as buying on margin. You hope that if you borrow money to invest, the interest on your investments will grow faster than the interest on your loan. Investors who buy securities on margin frequently have to pledge their entire portfolio or account balance as collateral. That could be a dangerous move. Most investors, especially individuals, should instead use cash to buy stocks and bonds due to the risky nature of buying on margin.
Balance Sheet: An organization’s assets, liabilities, and shareholder equity are displayed on a balance sheet.
Book Value: When all of a company’s liabilities are deducted from its total assets, the remaining value is known as book value.
Income Statement: A company’s revenues, costs, taxes, and net income are all displayed on an income statement.
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