Most people see investing as an extremely complicated ordeal. And it is…
If you let it be.
Investing does not have to be nearly as complicated or convoluted as the media makes it out to be. In order to make money in a sane way in the stock market, you just need to keep it simple. The KISS method will almost always lead to better returns than trying to beat the market.
With that said, the beginning of your investment journey needs to start with what all of this new vernacular actually means. I wish I had a guide like this when I started. The sheer volume of new terminology is outrageous.
To this end, let us begin.
- 401k: The 401k is the quintessential retirement vehicle that is supplied by your employer. You are allowed to invest up to $18,000 pre-tax per year and hopefully, your employer will match some of your contributions. Contributions to the 401k are directly deposited out of your paycheck. Check out this post for much more info.
- Ask: This is the lowest price a seller is willing to accept for an asset. On the market, you set an ask as a seller and bid as a buyer to try and trade stocks with each other.
- Asset: An asset is anything you own that has value. Assets include stocks, bonds, commodities, real estate, mutual funds and others related to investing. Assets also include your house and your mental capital or your personal ability to provide value to others.
- Asset Allocation: You need a diversified portfolio in order to not go bust in the stock market. In order to do this, you need to look at the different asset classes that your investment assets are in and try to balance them to reduce your risk. Check out this post on the Best Investment Allocation.
- Asset Class: In order to better classify securities, they are grouped into classes of similar types. They are grouped by location, type of security (bond, stock, cash), and type of business.
- Balance Sheet: A standardized accounting statement of a company’s financial position. It includes the company’s assets (capital) and liabilities (outstanding payments). You would look at a balance sheet in the research phase before you buy into a stock. You are looking to see if the company is profitable and will continue in that manner.
- Basis: Your basis is the amount of money that you paid for a security. The current value may be higher or lower than your basis and this is what drives the gains and losses in the stock market.
- Bear Market: A falling market like that of 2008 is a bear market. A bear market has a downward trend for an extended period of time outside of the normal fluctuations of the market.
- Bid: The bid is the opposite of the ask. The bid is the buyer’s highest acceptable price for a security. With electronic trading, both of these don’t matter quite so much anymore because they are matched up nearly instantaneously.
- Bond: An investment that is essentially a loan to a company or entity. The bond is the promise that the government or company will repay you the principal plus interest.
- Book Value: The book value is the net worth for a publicly traded company. It is the value of their assets plus their common stock equity value minus all liabilities. It is generally used as one of a number of measures to determine the healthiness of a companies finances.
- Broker: A broker is an entity that buys and sells investments on your behalf. You normally have to pay them a fee for the privilege, even in the days of electronic trading when no one is physically doing anything for you. Brokers can charge per transaction or a set percentage of your assets.
- Brokerage Account: This is the main taxable account that you will have. All gains are taxable in this account, but there are no tax related withdrawal restrictions.
- Bull Market: This is the growing market. A bull market always follows the bear market. The market from about 2010 to 2017 has been one of the longest bull markets on record.
- Capital Gains (Losses): The difference between the amount of money you paid for your investments and the current value of the investments is the gain or loss. It becomes capital gains when you sell your investments and lock in those gains/losses. Capital gains are taxable except when held within tax-exempt accounts. You can also sell some of your stock at a loss to offset gains for tax minimization.
- Commission: This is the fee that you pay your broker to conduct a transaction in the stock market for you. It is generally a flat fee, but can also be a percentage of money invested.
- Derivative: The derivative is one of the investment types that helped create the bubble and bring down the stock market in 2008. A derivative is a security with a price that is derived from one or more underlying assets. It is a contract between 2 or more parties based upon the underlying assets with the value changing based on the underlying asset’s value. Confused? Me too, stay away from derivatives.
- Diversification: Ever heard the saying, “don’t keep all your eggs in one basket”. This is very true of the stock market and investing. Putting all your money in one company is a good way to lose all your money. Diversification allows you to spread it out and benefit from averaging across many companies, industries, countries, etc.
- Dividend: Some companies pay their shareholders on a regular basis. The money comes from the profits of the company. A proportion decided by the board of directors is then allocated for payment to all shareholders at a set rate per share. They are generally paid monthly, quarterly, semi-annually, or annually. They are taxable gains.
- Dow: The Dow Jones Industrial Average is the oldest index in the US and is a price weighted list of the 30 largest public companies in the US. It is often used as a measure of how healthy the stock market is.
- DRIP (Dividend Reinvestment Program): Many of your brokerage firms will automatically reinvest your dividends for you. Otherwise, the dividends are paid out to you by check or placed in your cash account within your investment account. The DRIP program allows you to put your investing on auto-pilot and not worry about it.
- Exchange-Traded Fund: The ETF is a group of stocks that is bundled together and managed by a fund manager. You are able to buy individual shares of the fund on the market. The difference from a mutual fund is that it is actively traded on the market during the day and the price will fluctuate throughout the day.
- Expense Ratio: The expense ratio is the cost of your fund. It represents the percent of assets that will be used for maintaining the fund and paying the fund managers throughout the year. Generally, lower is better when it comes to expense ratios. The best in the industry is less than 0.05% for passively managed index funds.
- Fund Manager: The fund manager is in charge of managing the assets of a mutual fund. Their job is to buy and sell securities in the fund to meet the goals of the fund.
- Index: The Dow is just one example of an index. An index is a mathematical calculation derived to show the health of a specific segment of the market. The market segment could be the entire market, the world market, or any smaller segment.
- Margin: To invest on margin is to take out a loan so that you can invest it. It is basically gambling with money you do not have. You can borrow money from your broker to buy more investments than you can afford with the hope that they grow and you can repay them. You get larger growth with a larger investment. However, the risk lies in the larger loss that is possible with investing on margin.
- Market Capitalization: The market cap of a company is the value of all shares. You take the total amount of shares on the market and multiply by the value of a share to get market capitalization. The largest companies are worth 100s of billions of dollars.
- Market Sector: A market sector is a grouping of companies based on the product or service they provide. Typical market sectors include energy, real estate, health care, etc.
- Market Segment: A market segment differs from a market sector because it groups companies based on their market capitalization. The different market segments are small, medium, and large cap.
- Mutual Fund: A mutual fund is a grouping of stocks and or bonds that are sold together. The fund is not actively traded on the stock market. The fund manager invests the fund’s money in the stock market based on the rules outlined in the mutual fund’s prospectus. The price per share of a mutual fund is only updated after the close of the stock market for the day. You can invest however much money in a mutual fund because you are not required to buy whole shares.
- NASDAQ: This is the technology company stock exchange in the US.
- NYSE: The New York Stock Exchange is one of the most famous stock exchanges in the world. Companies all over the US and even some international companies are included on the NYSE located on Wall Street in New York City.
- Options: Options are another name for derivatives that are sold on the market. An option contract offers the buyer the right, but not requirement to buy (call) or sell (put) a security or other asset at an agreed-upon price (the strike price) during a certain period of time. These are also highly confusing and not worth your time.
- P/E Ratio: The price to earnings ratio reflects the value of the stock vs the total profit of a company. It can be calculated by market capitalization divided by total profit or price per share divided by profit per share. The higher the P/E ratio, the higher the expectation for good performance.
- Portfolio: Your portfolio is all of your different investments together. The investment portfolio does not all have to be at one brokerage firm or in one type of account. It is all of your financial assets aggregated together. Personal Capital has some great tools to analyze your portfolio.
- Principal: The principal is the initial investment you make into the stock market. In other words, it is the price you paid for your investments before gains.
- Prospectus: This is an important investment document that comes with every investment. It defines the goals of the company or fund and also outlines the financial position of the investment. Prospectuses come for all investments including stocks, mutual funds, ETFs, bonds, etc.
- Return: The return is the gain/loss in value of a security over time.
- Roth IRA: The Roth IRA is a retirement investment vehicle in the US that allows you to put after-tax money in it and then withdrawal after retirement all gains tax-free.
- S&P 500: The Standard and Poor’s 500 is another index like the Dow, however it covers a larger segment of the economy. It includes the largest 500 stocks in the US and is another very good indicator of overall stock market health.
- Stock: A stock represents part ownership of a company. When you buy a stock you are buying a piece of a company and you have the opportunity to sell it later on. A company divides their ownership up into a predetermined amount of stocks and then puts out an IPO (initial public offering) for everyone to buy it. After that stocks will go up and down with a companies successes and failures and the speculations of investors. The goal obviously is to sell it for more than you paid for it.
- Stock Exchange: There are stock exchanges around the world. These are the locations that the companies are traded. Almost all trading today is done electronically, but each company has to decide which exchange it will be traded on.
- Stock Market: The stock market is the aggregation of all stocks and securities sold on a particular exchange. The stock market really embodies the value of all companies on average and gives you an easy place to invest in various companies.
- Traditional IRA: The Traditional IRA is the counterpart to the Roth IRA and is the pre-tax investment vehicle in the US. All contributions throughout the year are tax-deductible, however, all withdrawals from a traditional IRA will be taxed. If you want to withdrawal before 59.5 there will also be a 10% penalty unless you follow special exemption rules.
- Unrealized Gain/Loss: Unrealized gain/loss is the counterpart to capital gains. Unrealized gain/loss is the difference in value from your basis. You can analyze your unrealized gain and losses to help decide when to buy and sell securities if you are trying to minimize capital gains taxes.
- Yield: Dividends are paid on a regular basis. The dividend yield or simply the yield is the amount of the dividend divided by the share price. Dividends are generally looked at on an annual basis, so quarterly dividends would be summed up. Typical dividend yields are 2-4%.
Investing does not have to be complicated. Hopefully, this list will help you get started in understanding all there is to investing. Start slow and be consistent and the gains will start compounding for you.
Did I miss anything that is essential to investing?
If you are an experienced investor, what else would you have liked to know when getting started? Let me know.
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