Confusing Terms Made Easy
If you have just signed up for your first 401K, or purchased your investments, you may realize that there are a lot of terms that you don't understand, and you're embarrassed to ask what they mean. When I first met my stockbroker husband, I didn't know the difference between a mutual fund and a municipal bond. This article may help prevent my readers from experiencing the same embarrassment! Although there are many different expressions that investors and stockbrokers use, here is a list of a few key investment terms that every investor will definitely want to understand. In fact, these are the investment terms that I wish I had known when I first met my husband!
In addition to the terms below, you can learn a great deal more about how the investment markets work and how you can invest in them by reading the Amazon book: "Investing for Dummies." I highly recommend it!
NYSE: The New York Stock Exchange is the largest stock exchange in the world. Billions of shares of stocks and bonds are traded there every day. Stock symbols on the NYSE are usually made up of three letters or less. For example, the symbol for the 3M Company is MMM, the symbol for General Electric is GE, and the symbol for AT&T is simply the letter T.
NASDAQ: The National Association of Securities Dealers Automated Quotations is the full name of the NASDAQ. No wonder people just call it the NASDAQ! It is a computerized stock exchange for tech companies. The stock symbols for the NASDAQ are usually made up of four letters. For example, Apple Computer's symbol is AAPL, Google's is GOOG, and Yahoo's is YHOO.
DOW: The Dow Jones Industrial Average (DJIA) is usually just called the Dow. It is the average selling price of the top 30 stocks on the NYSE. People watch the price of the Dow because they believe it is one measure of how stocks are performing in the overall market.
S&P 500: The Standard and Poor's 500 gives an even larger view of how equities are performing, because it tracks the prices of 500 different stocks. Although most of the S&P 500 stocks are listed on the NYSE, some of them are traded on the NASDAQ.
Bull: A Bull is an investor or analyst who believes that the investment market is going up, and the economy is doing well. Bulls are most likely to be buying equities with the expectation that both the overall market and the price of the individual stocks they are buying will go higher. In a bull market, the prices of most stocks are going up.
Long: When a person invests in a company it is called being long.
Bear: A Bear has the opposite opinion of a Bull. They believe that the market is going to head down soon, and that there are serious problems in the economy. Sometimes Bears can be quite pessimistic and negative about the state of our economy. However, when the Bears are right, they have been know to make a lot of money from their negativity by selling stocks short. In a bear market, the prices of most stocks are going down.
Short: When an investor has a negative outlook and sells a stock with the expectation that it will go down, and they will be able to repurchase it in the future for less money, it is called being short.
Capital Gain: Your capital gain is the profit that you make when you buy a stock at one price, and sell it at a later time for a higher price. Capital Gains can be either short term or long term, which impacts the amount of tax you pay on the gain. The IRS requires that you report whether the gain is short term or long term, so be sure to keep tract of when you buy and sell each stock.
Capital Loss: A capital loss occurs when you buy a stock at a certain price, and sell it later for less money. Investors need to keep careful track of their capital gains and losses for income tax purposes.
Dividends: Dividends are the investor's share of a company's profit. They are usually paid out quarterly.
Dividend Yield: The dividend yield is the rate of return, based on the current price of the stock and the dividend the stock is paying. For example, if your stock is $100 a share, and it pays $3.00 a share in dividends, you are getting a 3% yield.
DRIPS: Dividend reinvestment plans allow stockholders to reinvest their stock dividends in more shares or partial shares of the stock without having to pay a commission.
Mutual Funds: Mutual funds own a wide variety of stocks. They are usually managed by professional money managers who decide which stocks to include or exclude from the pool of stocks owned by the fund. When you put your money in a mutual fund, your risk is spread out because the fund owns so many different investments.
ETFs (Exchange Traded Funds): These are funds, or groups of stocks, that are combined and sold as a unit on the stock exchange. Most are not managed by professional money managers; instead, they are representative of a sector. You can find ETFs that include gold stocks, financial stocks, currencies, and most segments of the S&P 500.
Treasury Bonds: When you buy a treasury bond (also called Treasury bills and notes) you are loaning money to the federal government. Some Treasuries will mature in a few months; others can take as long as 30 years. In return, you receive interest on the bonds. Because they are backed by the federal government, Treasury bonds are considered a low risk investment.
Municipal Bonds: State and local governments alsoissue bonds to pay for things like schools, parks, highways, libraries and other public buildings. Municipal bonds are also called Munis. One advantage of buying Munis is that the investors usually do not have to pay taxes on the interest they earn.
Corporate Bonds: Corporations can also sell bonds. They do this to raise money to expand their businesses. In order to encourage investors to buy their bonds, corporations frequently pay a higher interest rate than investors receive on treasury bonds or municipal bonds. However, the risk is also higher, and investors do have to pay taxes on the interest income.
Junk Bonds: Junk bonds are the highest risk bonds. They offer high yields, but are considered below investment grade.
SEC Forms 10K and 10Q: These are quarterly and annual reports that public corporations are required to file to inform investors about their financial condition.
Diversification: Diversification is one way that investors lower their risk of large financial losses. This means that you have your assets spread out in many different investments. For example, you may own stock in several different companies, even different industries. In addition, you may have money in mutual funds, your home equity and savings.
As you buy and sell different equities and funds, you will gradually become more comfortable with a variety of investment terms, in addition to the key terms mentioned above. Another way to learn more about the stock market and investing is to join an investment club. These investment groups are a great way to make friends as well as money, and to learn about the stock market at the same time.
If you are interested in investing, belonging to an investment club, or getting information on personal finances, you may also wish to read some of these articles:
This Book Is Great for Anyone Getting Started in the Stock Market
Amazon Price: $22.99 $13.24 Buy Now
(price as of Jun 2, 2016)