Investing Terminology Overview
Getting started with investing can be intimidating for many people simply because they do not understand the jargon used in the investment world. News media hosts and financial advisors are notorious for using acronyms and terms that average or new investors are unfamiliar with. A common word for this is “Finglish” or “Financial English.” Whether it is to try and impress their audience or sound more intelligent than they are, using “Finglish” more often than not will turn a would-be investor away.
As with all our advisors at Whitaker-Myers, my goal is to advise with the heart of a teacher. This article is intended for people new to investing or considering investing, but it might also be a nice refresher for the investor with more experience. Here are some different terms that should help you become more comfortable investing. Always consult a professional before investing so you understand the risks associated with investing.
A security is a stock, bond, mutual fund, or other investment that can be traded. The Securities and Exchange Commission (SEC) regulates securities trading. In case you are wondering, gold is not considered a security.
An asset is anything that has economic value with a demand to buy. Stocks, bonds, cash, and real estate are all examples of assets.
Asset allocation refers to how investments in a portfolio are chosen to match the risk tolerance and goals of the investor. Blended asset allocations include stocks, bonds, cash, or alternatives like real estate or commodities. Proper asset allocation differs for each investor and can best be determined by speaking with a financial professional.
Return is the profit or loss made from an investment.
Investment risk is the degree of uncertainty and/or potential financial loss from an investment. All investments carry some degree of investment risk.
Liquidity is the ease of turning an investment into cash and how much it will impact the price. Examples of liquid assets include cash, stocks, mutual funds, and ETFs. Less liquid investments include real estate, annuities, and precious metals.
A capital gain is the increase of the value of a capital asset, such as a stock, that ultimately has a higher value than when it was purchased.
A ticker symbol is an abbreviation (usually one to five letters) used to identify a publicly traded company on a particular stock exchange. Ticker symbols are often used for pooled investments like mutual funds and ETFs. Here are a few examples of some publicly traded companies and their ticker symbols: Amazon (AMZN), Tesla (TSLA), Walmart (WMT), Coca-Cola (KO), and Alphabet (GOOGL).
A stock is a security that provides proportionate ownership in a publicly traded company. Stock is a broad term that can mean a single or multiple publicly traded companies. Stocks are bought and sold mainly on stock exchanges, a marketplace for these transactions. A share of stock is a specific number of units owned by the investor that represents their ownership percentage in the company. For example, as of this writing, there are 15,787,154,000 outstanding shares of Apple (AAPL). When you buy a share of Apple stock, you purchase it from another investor, selling it on the open market at a given price. If you buy one share of Apple stock, you become 1/15,787,154,000 owner of Apple. A company's stock price will increase or decrease depending on market conditions, economic conditions, company-specific events, etc. There is no guarantee that the investor will make money when investing in stocks, so they inherently carry more risk than other types of investments. However, buying the right stock at the right time can be highly financially rewarding.
A bond is a type of security that a company or government issues to raise capital (money). Essentially, a bond is a loan to the issuer, and you, the investor, are the lender. The bond issued is a legal obligation on the issuer to repay the principal loan, plus interest to the investor. Bonds carry less risk than stocks, but they are most definitely NOT risk-free. Interest rate risk, reinvestment risk, default risk, and liquidity risk are just a few risks associated with bonds. Bonds also have ratings that tell the investor the level of risk they can expect when deciding whether to invest. Lower-risk bonds typically have lower returns, and higher-risk bonds usually offer higher returns. Check out the table below to see different bond ratings and the level of risk they carry. Any rating below BBB is considered a “Junk” bond.
An expense ratio is the cost to the investor that a mutual fund or ETF charges to manage the fund. It covers all the fund's expenses, including management, administration, advertising, etc. The expense ratio is built into the fund's daily net asset value (NAV) and is not a separate charge to the investor. The formula to calculate a fund’s expense ratio is The Total Fund Costs divided by The Total Fund Assets.
Net Asset Value (NAV)
Net asset value, or “NAV,” is an investment fund’s total assets minus its liabilities. The formula to calculate the net asset value per share is Fund Assets minus Fund Liabilities divided by Total Shares Outstanding.
A mutual fund is an investment where pooled money from multiple investors gets invested in stocks, bonds, or other securities. Investing in mutual funds gives investors more diversification than they would earn from buying an individual security. A stock mutual fund, for example, might invest in all 500 companies that make up the S&P 500. Now, the investor is diversified across 500 companies instead of one, which can mitigate risk. Mutual funds are also managed by a Fund Manager (often an entire team) whose job is to attempt to achieve the goals of the fund they manage.
ETF (Exchange Traded Fund)
An ETF is like a mutual fund in that it is pooled money by multiple investors that gets invested in stocks, bonds, or other securities. One significant difference between mutual funds and ETFs is that a mutual fund only trades once daily after the market closes at 4:00 p.m. Eastern, and ETFs trade “intra-day” between 9:30 a.m. and 4:00 p.m. EST while the market is open. Also, ETFs tend to be more tax-efficient than mutual funds because of their structure.
A company with a market capitalization value of more than $10 billion. If you are familiar with Ramsey Solutions, this will fall in the Growth or Growth & Income category of their 4 categories.
A company with a market capitalization value between $2 billion and $10 billion.
A company with a market capitalization value between $250 million and $2 billion.
Both Mid-Cap and Small-Cap would be considered Aggressive Growth in the 4 categories.
This video on our YouTube Channel discusses the Ramsey Solutions 4 categories of Growth & Growth & Income (Large Cap), International, and Aggressive Growth (Small-Cap and Mid-Cap). We also give examples of stocks that would fall into those categories.
Working with an advisor
This list barely scratches investing terms' surface but is a good start. You do not need to know everything there is to know about investments to get in the market and start investing for your future. A great place to start would be to schedule a phone call with me or one of our other advisors. We are not the type of advisors that will “Finglish” you out the door. We aim to help you understand the importance of investing and planning and how crucial they are to help you reach your financial goals.
Commonly Used Investing Terms That All Investors Should Know
November 2, 2023
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