BreakingModern — Whether you call it jargon, gobbledygook or gibberish, insider terminology confuses and confounds those of us looking in from outside. The financial and investing universe is notorious for using obtuse language to describe what are essentially simple-to-comprehend concepts. If you are going to achieve any measure of financial independence, you will have to familiarize yourself with the language of the craft.
Play the Game
Look at it this way. Investing in the stock market is essentially a game and these are the parameters of that game. To play any game with success, you have to understand the rules and how you win or lose.
Here is a glossary of some basic financial and investing concepts that you need to understand as an investor and as a player in the stock market. There are plenty of other more-advanced terms to learn, but we can cross that bridge when we come to it.
- 401(k): An investment account provided by an employer for their employees. A 401(k) typically invests in mutual funds, which invest in the stocks of many companies. If your employer offers a 401(k) you should take advantage of it.
- Bears and Bulls: In stock market parlance, bears are people who believe the overall market or a particular stock price will go down in the future. Bulls believe the market or stock will go up.
- Capital Gains or Losses: When you sell a stock, your proceeds will either be more than what you paid for the stock or less. If it’s more, it is a capital gain. If it is less, it is a capital loss. The “capital” part is important because capital gains and losses are taxed differently than normal income taxes.
- Capitalization: This is the basic measurement of a company’s overall worth and is used to classify size. Companies like Google and Apple are called large, while a company like GoPro is said to be a small “cap” (short for capitalization) stock.
- Commissions: The fee you pay to your stockbroker, whether it is a person or one of the discount trading websites, is called a commission. E-Trade, for example, charges $9.95 for each transaction.
- Correction: This is the term market experts use to describe the stock market when all the indexes are moving down significantly. The “correction” talk typically begins when the major indexes have dropped five percent.
- Dividends: When a company becomes well established with sustainable cash flow, the board of directors will often pay out a dividend to shareholders. These payments are most often made quarterly, but monthly and annually are not out of the question.
- Dividends Reinvestment: One of the more powerful investment strategies is to reinvest dividends in the stock that produced them. The result is similar to compounding interest in a savings account.
- Earnings: Another basic measurement of a company’s performance is earnings. Simply put, this is the profit remaining after all expenses are applied in any company.
- Earnings Per Share: This is the primary measurement of a company’s performance. Earnings per share (EPS) is equal to a company’s earnings divided by the number of shares of stock available on the market.
- EBITDA: The acronym stands for Earnings before Interest, Taxes, Depreciation and Amortization. To keep things simple, this is the net income of a company after subtracting only standard operating expenses from revenue.
- Indexes: A stock index is used to measure the performance of the overall stock market. There are dozens of indexes, including ones that are based on industries, company size and country of origin, but the main indexes mentioned on the news each night are broad measures of performance.
- S&P 500: 500 stocks chosen by Standard and Poor’s.
- Dow Jones Industrials: Dow Jones Industrial Average is made up of 30 large cap stocks.
- NASDAQ: Measures the performance of all stocks listed on the NASDAQ stock exchange.
- IRA: Putting money into an Individual Retirement Account allows you to defer paying taxes on that income until you withdraw the money from the account at a later date. It is a great financial tool that you should take advantage of even if you have a 401(k).
- Roth IRA: While the normal IRA defers taxes until a later date, the Roth IRA requires you to pay taxes on your contributions each year. The tradeoff is that all of the money withdrawn from that account in the future will be non-taxable income.
- Margins: When you borrow money in order to purchase stock or other financial instruments, you are buying them on margin. This is very risky and only recommended for highly skilled professionals.
- Operating Expenses: The normal expenses a company spends to manufacture and sell a product or to provide a service.
- PEG Ratio: The Price to Earnings to Growth ratio is calculated by dividing a company’s price to earnings ratio (P/E) by its earnings per share. The PEG is a way to compare performance between stocks.
- Price to Earnings Ratio (P/E): This is one of the most important performance measurements for stock investors. When you divide a company’s stock price by the same company’s earnings per share you get a result that is called a multiple. This is another measurement that allows you to compare the performance of one company against another company.
- Revenues: This is the income generated by a company before considering any expenses.
- Stock: The best way to define a stock is as a piece of paper that reflects partial ownership of a company. However, the important thing to remember is that a stock on the open market is not the same thing as the company it represents. Stocks of very good companies can go down, just as stocks of very bad companies can go up. Stock performance does not always correspond to company performance.
- Stock Exchange: These are the services that provide the market infrastructure that allow stocks to be traded.
- Stock Price: The stock price is the agreed upon price between a seller and a buyer that results in a transaction.
Arm Yourself with Knowledge
Obviously, this glossary only scratches the surface when it comes to the vast amount of investment industry jargon. But knowing these terms gives you a basic foundation that you can apply to the other articles in this series.
As I said, financial independence is going to require some effort and familiarizing yourself with the basic investing terminology is the first step.
Is there a financial concept or general question you have? Drop me a comment and I will do my best to answer it. Look for my continuing series on taking charge of your financial future.
For BMod, I’m Mark W. Kaelin.
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