Investing Terms and Slang
There are many different terms that come to mind when investing jargon comes around. ETFs, TAM, enterprise value, EPS, and many more. Continue reading to learn the most common investing terms so you can better understand the market, and become a more successful investor.
Seems like a fancy term right? Well, asset allocation means exactly what you would think, how you will allocate your assets. A non-fancy term for this is your investment strategy.
Investments come in many different forms and we call them asset classes. It could be stocks, bonds, gold, or real estate. Each are an example of their own asset class. Asset classes are commonly referred to when discussing diversification strategies.
The opposite of a bull market is a bear market. Whenever investors do not see much optimism in the market, it is referred to as a bear market.
Blue Chip Stock
A blue-chip stock refers to a stock that has had a history of positive earnings reports, balance sheets, and dividend increases.
A bond is a type of investment in which an institution agrees to terms to repay and investment with a coupon rate. Think of a bond as a loan plus interest (the coupon). The most common types of bonds are government bonds and corporate bonds. While government bonds are considered less risky, they also provide less interest.
Whenever a stock recovers from a drop in value, some will call it a “bounce”. A bounce is a great sign for a stock as it represents an increase in value.
You’ve probably heard the term bull market thrown around whenever the economy seems to be in good shape. This term is used by investors referring to a market that is encouraging and on the rise.
A type of options contract that gives the owner the option to purchase an asset at a specified price at a later date
CD (Certificate of Deposit)
You’ve probably heard of the term CD before, and we’re not talking about the disc that you slide into a player to listen to music. A CD is a Certificate of Deposit. A CD is similar to a savings account in that it is typically offered by banks and credit unions. The drawback to a CD is that the terms of the deposit are fixed. You must leave your money in the account for a fixed time period and you will receive a fixed amount of interest. The advantage of a CD is that they typically pay higher interest rates than savings accounts.
According to the Oxford dictionary, a commodity is “a raw material or primary agricultural product that can be bought or sold”. Some of the most popular commodities are crude oil, gold, corn, or coffee. These items are used to make many products we consume in our day to day lives such as gasoline, high fructose corn syrup, or your morning cup of coffee. Commodities are known the be very volatile and have massive fluctuations in value based on climate, political, or economic factors. For example, if there is a major drought, the price of corn may rise as the supply falls.
A value given to the overall optimism of consumers that is conducted by Nielsen.
Cryptocurrency is defined as “a digital currency in which encryption techniques are used to regulate the generation of United’s of currency and verify the transfer of funds, operating independently of a central bank”. While cryptocurrencies are relatively new to the market and many investors are not fond of them as investments, we still consider it to be a valuable way to store assets. Some of the most common cryptocurrencies are listed below:
- Bitcoin (BTC)
- Bitcoin Cash (BCH)
- Ethereum (ETH)
- Ripple (XRP)
- Litecoin (LTC)
Whenever a downturn happens in the economy, you’ll probably hear the phrase “buying the dip”. This phrase is used by investors as a way to purchase stocks and equities at a lower price than normal. It is common for these investors to believe the lower price is only short term.
Whenever companies make profits, they can decide whether to reinvest their profits in hopes of even furthering the value of the company, or they can return those profits to their investors as a dividend. Stocks that typically offer high dividends are called value stocks.
Growth stocks are stocks that instead of offering dividends to its investors, they chose to reinvest most of their profits to further the value of the company.
EPS is an acronym for Earnings Per Share. EPS can tell you how much profit the company generated on a per-share basis. Many financial analysts use EPS to understand how a company is performing relative to other companies.
Equities are extremely similar and in many cases the same thing as stocks. When you think equity, think ownership. Have you heard of the term home equity? That is how much of your home you “own”. In accounting, equity refers to how much money was contributed by the owners of the business.
Exchange-Traded Funds (ETFs) is an investment fund that is traded on a stock exchange. Think of it as a bundle of different investments such as stocks, bonds, securities, and commodities that can be traded intraday. Some of the most popular ETFs are:
- SPY (SPDR S&P 500 ETF)
- VOO (Vanguard S&P 500 ETF)
- EEM (iShares MSCI Emerging Markets ETF)
EV (Enterprise Value)
Enterprise Value is a measure of a company’s true worth. Whenever you purchase a stock or invest in a company, that company might have cash on hand or debts that it owes. Therefore, when analyzing an investment, you should remove this capital and these debts to better understand how much the business is actually worth. To calculate EV, use the formula below.
EV= Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and Equivalents
Federal Funds Rate
Every night, banks must maintain a percentage of their assets in cash on hand in case consumers want to withdraw their money. This percentage is federally mandated by the Federal Reserve, which has been around since 1913. It ranges from 3-10% depending on the size of the bank.
Whenever banks lend out money, perhaps for a mortgage or a personal loan, some of that money disappears. If the bank does not keep the mandated levels of cash on hand, they are forced to borrow from other banks. The percentage that the banks charge to each other is called the Federal Funds Rate.
While the Federal Funds Rate does not directly impact the cost of mortgages, credit card rates, and personal loans, it does indirectly impact them. If Federal Funds Rates are low, banks can borrow money for cheaper, which allows them to lower rates for its customers. This makes the Fed rate one of the most important rates for consumers looking to get a new mortgage or credit card.
It’s also worth noting that a low Federal Funds Rate makes it cheaper to borrow money, but has an inverse effect on savings accounts. If you have a savings account or are looking at a potential CD, these interest rates will go down.
Fin tech is the acronym for Financial Technology. These businesses provide a broad range of solutions for the financial sector. Some of the most well known Fin Tech companies are: Acorns, So-Fi, Robinhood, and many others.
Index funds are a common type of mutual fund that have low fees and are tied to a specific sector of the economy. This makes it extremely similar to an ETF and many times the same.
Large cap stocks are stocks that are valued over $10 billion. Think Apple, Microsoft, or Coca Cola.
Market Capitalization (also known as market cap) is a companies valuation based on its outstanding shares. Calculate a companies market cap with the formula below
Market Cap = Shares Outstanding * Market Price Per Share
Medium cap stocks are companies that are valued between $2 billion and $10 billion.
A mutual fund is very similar to an ETF with a couple of main differences. Mutual funds cannot be traded intraday. The trade will occur at the end of the day. It is common that mutual funds contain more diverse assets and have higher fees associated.
An option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price. There are two types of options contracts: puts and calls. A call option gives the buyer the right to buy the underlying asset. A put option gives the buyer the right to sell the underlying asset.
Whenever a firm or individual choses to hold less of a specific asset class relative to others. For example, a firm might be underweight equities if they believe they can find stronger yields elsewhere, such as in bonds or real estate.
Whenever a firm or individual choses to hold more of a specific asset class relative to others. For example, a firm might be overweight equities if they believe equities will provide stronger returns than other assets.
Price to Earnings Ratio (P/E)
P/E is a ratio that explains how the market is valuing a company based on its earnings. You can use this ratio for guidance if a stock is under or overvalued. For example, a company with a PE of 3 might be in trouble as the price is only 3 times the companies earnings. In theory, it would only take you three years of the same earnings to pay off your investment.
A prospectus is required by law to be provided whenever purchasing a publicly-traded investment such as a stock, mutual fund, or ETF. It will outline everything about your investment such as fees, commissions, or other financial details regarding your investment.
A type of options contract that gives the owner the option to sell an asset at a specified price at a later date.
An acronym for Quantitative Easing in which the Federal Reserve pumps money into the the market by purchasing a set amount of government bonds or other financial assets.
Whenever you make an investment, you hope to make a return that is greater than your original investment. The amount of your gain, or loss, is your return on investment (ROI).
Small cap stocks are companies that are valued between $300 million and $2 billion.
In the most simple terms, a stock is a small piece of ownership in a business. For example, if you buy one share of Apple’s stock, you will own one small portion of Apple’s business. A stock can also be called an equity.
TAM is an acronym for Total Addressable Market. A company that has a large target audience and is only capturing a small portion of them at the moment can use TAM to justify why you should invest in them. Think of TAM as potential. For example, a relatively new company that is trading at 50 times earnings might use TAM as one of the reasons they’re priced so high relative to other companies.
Treasury notes are very similar to treasury bonds, with the only difference being the maturity dates offered. Treasury notes are offered with maturity dates less than 10 years. The most common are the 2-year and 10-year treasury notes.
Value stocks are stocks that typically offer high dividends relative to their financials.
Whether you’re new to investing or have been in the market for some time, learning the terms and slang of investing is an evolving process. We’ll be updating this post as new terms are formed so be sure to check back! Want to learn more about investing? Check out our Beginners Guide to the Stock Market.
Recommended Reading: If you haven’t taken your time to read the Rich Dad’s Guide to Investing, it’s well worth your time!
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