Basic Investing Terminology
Obviously this isn’t a full exhaustive list of every term in the financial world, just a selection of some of the more common terminology you may encounter as a beginning investor. It can get a little confusing at first, but can be learned relatively quick.
Stock/Preferred Stock - A unit of ownership in a company’s shares (also referred to as equity). These give you voting rights and sometimes a share in the profits by way of dividends.
* Common Stock - Grants voting rights and a share in dividends.
* Preferred Stock - Grants limited to no voting rights, but a higher priority claim to the asset. They get paid before common shareholders.
Dividend - A portion of company earnings paid to shareholders.
Bull Market - A market condition where stock prices are rising and expected to rise even more in the near term. This can also be applied to an individuals position in a stock. To say one is “bullish” on a particular stock means the person believes the stock value is on the rise and expected to rise further.
Bear Market - A market condition where stock prices are on the decline and expected to fall lower. This can also be applied to an individuals position in a stock. To say one is “bearish” on a stock means the person believes the stock value is falling and could fall further.
P/E Ratio - Valuation of a company based on Stock price to Earnings Per Share. The calculation is exactly as stated Stock Price/EPS. Assuming the company isn’t in a decline, a low P/E ratio means your getting a good deal on the stock. For example, if the P/E were 10, that means the stock is trading at 10x earnings which is generally a reasonable value. An example of an unreasonable P/E would be Tesla, which as of this writing is at 610.44 or over 610x earnings.
Crypto - Cryptocurrency. Honestly should be called cryptoasset as it’s not a true medium of exchange like money. It’s a store of value recorded on a virtual ledger (the blockchain). On the positive side, it’s decentralized and can’t be counterfeit. On the negative, it’s value is highly speculative and volatile making it a risky investment choice. And like any technology, there are bound to be vulnerabilities somewhere.
Altcoins - Altcoins are basically alternate forms of crypto from bitcoin, the first and most well known of cryptocurrency.
Blockchain - The ledger database of cryptocurrency. Transactions are stored in blocks. When one is filled, a new one is formed and “chained” to the last one. Run by a mass collective of computers as opposed to a centralized system.
Index Fund - A collection of stocks that track an index. Examples of big indexes would be the S&P 500 (VOO), Nasdaq (QQQ) and Dow Jones (DIA).
Mutual Fund - A simplified way to put this. Tons of investors pool their money together in a fund managed by a money manager. This manager then invests that money in whatever assets the fund is targeting. Gains, losses and dividends are shared by everyone invested in the fund. The managers are paid a percentage of the pool in the form of an expense ratio. Investments into mutual funds occur once per day as opposed to ETF’s traded throughout the trading day.
ETF - Exchange Traded Funds. These are a lot like index funds as they generally track indexes and are more often passively managed. Unlike the pooled fund of a mutual fund, investment into ETFs are traded like stocks.
Hedge - Offsetting asset risk through another security. The classic example is investing in gold to hedge against inflation. More currently, many are investing in crypto in the same way.
Short Selling - Short selling happens when you borrow stock at a given price with the expectation it will decrease in value in the short term. Example. You borrow 10 shares for $10 per share and sell them ($100). The share price decreases to $5 per share. You then buy those 10 shares back at $5 per share ($50) and return those shares to who you borrowed from. The other $50 from the initial sale is profit to you. It’s highly risky however. If the stock price happens to rise instead of fall, you could lose an indefinite amount of money depending how high it goes before you buy the shares back. You can’t wait forever either as there is a time limit to returning the shares you borrow.
EPS - Earnings Per Share. Basically gauges a company’s profitability by dividing it’s net income by shares outstanding. If the company issues preferred stock, you subtract that from net income before dividing by shares outstanding. The higher the EPS, the higher the profitability.
Limit Order - Setting an order to buy a security at a specified price.
Prospectus - You’ll see this one a lot. A prospectus is a detailed outline of a company’s stock offering. It typically includes details on the company itself, financials and everything about the securities being issued (types of stock, how many shares issued, etc.).