Understanding Basic Investing Terms – Read this First!
How often are you put off by investing conversations because of the jargons used? The world of investing is very much a culture by itself and the first step to understanding it better is none other than to de-code its language. I very much try to avoid using jargons in my articles but I also hate over-explaining myself to disrupt the overall information flow, so please refer to this list every time you come across an investing/financial term unfamiliar to you.
This list is not exhaustive and I will add new terms as and when I introduce a new topic in any of my articles. I categorise the glossary according to the context they are likely to be used so it’s more intuitive, you’re welcome 🙂
A. Types of Investments
A.1. Mutual Funds – A mutual fund is managed by a professional portfolio manager that purchases securities with money pooled from individual investors. The fund can hold individual stocks or bonds. Such funds typically come with higher fees than other investments, since the account is actively managed.
A.2. Index Funds – An index fund is a type of mutual fund that allows an individual to buy investments that mimic the trends of an index. These are generally more passive investments with lower fees than mutual funds.
A.3. Exchange-Traded Funds (ETF) – a type of investment fund that trades like a stock but tracks closely to an index. It is similar to a mutual fund but is passively managed as it follows the performance of an index. Investors buy and sell ETFs on the same exchanges as shares of stock.
A.4. Unit Trusts – A unit trust is an unincorporated mutual fund structure that allows funds to hold assets and provide profits that go straight to individual unit owners instead of reinvesting them back into the fund.
A.5. Pension – A pension is a tax-efficient way to save for your retirement. It aims to provide you with a source of income in later life. Each country has its own pension scheme such as IRA in US, Superannuation in Australia and CPF in Singapore.
A.6. Stock, Shares, Securities, Equity – Securities that represent ownership in a corporation; must be issued by a corporation.
A.7. Bonds, Fixed Income – A bond acts like a loan or an IOU that is issued by a corporation, municipality or the government. The issuer promises to repay the full amount of the loan on a specific date and pay a specified rate of return for the use of the money to the investor at specific time intervals. Similar to bonds, fixed income is a security that pays a set rate of interest on a regular basis.
A.8. Government Bonds/Bills – Negotiable debt obligations issued by governments and backed by its full faith and credit. Bonds are long-term (typically 10 year or more) whereas Bills are short term (typically a year or less)
A.9. Cash – Cash investments include everyday bank accounts, high interest savings accounts and term deposits.
A.10. Currency – a medium of exchange for goods and services.
A.11. Properties – Property is also considered as a growth investment because the price of houses and other properties can rise substantially over a medium to long term period.
A.12. Real Estate Investment Trust (REIT) – REIT is a portfolio of properties and trade as if they were stocks and have special tax treatment. There are all different types of REITs specializing in all different types of real estate. REITs often trade on major exchanges like other stocks, so they move with the market.
A.13. Futures – Derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price
A.14. Contract For Difference (CFD) – A financial contract that pays the differences in the settlement price between the open and closing trades
A.15. Commodities – A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Traditional examples of commodities include grains, gold, beef, oil, and natural gas
A.16. Portfolio – A collection of investments owned by one organization or individual, and managed as a collective whole with specific investment goals in mind.
A.17. Capital – The funds invested in a company on a long-term basis and obtained by issuing preferred or common stock, by retaining a portion of the company’s earnings from date of incorporation and by long-term borrowing.
B. Market Players
B.1. Brokerages/Brokers – This is the entity that buys and sells investments on your behalf. Usually, you pay a fee for this service. An example will be TD Ameritrade, DBS Vickers, Saxo Bank, Charles Schwab, POEMS
B.2. Financial Institutions – a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange. They also issue units/manage funds.
B.3. Shareholders – The owner of common or preferred stock of a corporation.
B.4. Bondholders – The owner of bonds.
B.5. Listed Corporates – Corporations listed on stock exchanges that issue shares for the public to purchase in the market
B.6. Fund Managers – A fund manager is responsible for implementing a fund’s investment strategy and managing its trading activities. They oversee mutual funds or pensions, manage analysts, conduct research, and make important investment decisions.
B.7. Robo-advisors – Robo-advisors or robo-advisers are a class of financial adviser that provide financial advice or investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms.
B.8. Custodian – A bank that holds a mutual fund’s assets, settles all portfolio trades and collects most of the valuation data required to calculate a fund’s net asset value (NAV).
B.9. Stock Exchange – This is a place where investments, including stocks, bonds, commodities, and other assets are bought and sold. It’s a place where brokers (buyers and sellers) and others can connect. An example will be the New York Stock Exchange, the NASDAQ or the Singapore Stock Exchange
B.10. Index – An investment index tracks the performance of many investments as a way of measuring the overall performance of a particular investment type or category. The S&P 500 is widely considered the benchmark for large-stock investors. It tracks the performance of 500 large U.S. company stocks.
C.1. Dividends – A dividend is a portion of a company’s profit paid to common and preferred shareholders. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends.
C.2. Interest – The fixed amount of money that an issuer agrees to pay the bondholders. It is most often a percentage of the face value of the bond. Interest rates constitute one of the self-regulating mechanisms of the market, falling in response to economic weakness and rising on strength.
C.3. Capital Gains/Loss – The difference between a security’s purchase price and its selling price, when the difference is positive/negative.
C.4. Distributions – Similar to a dividend, distribution is the disbursement of assets from a fund, account, or individual security to an investor. Mutual fund distributions consist of net capital gains made from the profitable sale of portfolio assets, along with dividend income and interest earned by those assets
C.5. Returns on Investment (ROI) – Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment.
C.6. Returns on Equity (ROE) – ROE is a measure of financial performance calculated by dividing net income by shareholders’ equity.
D. Market Indicators
D.1. Ask (price) – The lowest price a seller is willing to accept when selling a security (stock)
D.2. Bid (price) – The highest price a buyer is willing to accept when buying a security (stock)
D.3. Spread – The difference between bid and ask prices
D.4. Yields – Yield represents the ratio between the stock price paid and the returns received (dividends paid + capital gains).
D.5. Market Capitalisation – The market value of a company, calculated by multiplying the number of shares outstanding by the price per share.
D.6. Volume – The number of shares of stock traded in a day.
D.7. 52 weeks high/low – A security’s trading high/low point over the last 52-week period.
E. Market Events
E.1. Bull Market – Any market in which prices are advancing in an upward trend. In general, someone is bullish if they believe the value of a security or market will rise. The opposite of a bear market.
E.2. Bear Market – A bear market is a prolonged period of falling stock prices, usually marked by a decline of 20% or more. A market in which prices decline sharply against a background of widespread pessimism, growing unemployment or business recession. The opposite of a bull market.
E.3. Earnings Release/Results – Financial results of a company or a fund, usually released quarterly or half-yearly.
E.4. Initial Public Offering (IPO) – An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors.
E.5. Rights Issue – A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.
E.6. Private Placements – A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market.
E.7. Takeovers – the acquisition of a public company whose shares are listed on a stock exchange
E.8. Merger & Acquisition – Mergers and acquisitions (M&A) refers to the consolidation of multiple business entities and assets through a series of financial transactions
E.9. Reverse Takeover (RTO) – A reverse takeover (RTO) is a type of merger that private companies engage in to become publicly traded without resorting to an initial public offering (IPO). The private company’s shareholder then exchanges its shares in the private company for shares in the public company.
E.10. Recession – A downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country’s gross domestic product.
E.11. Depression – An economic depression is an occurrence wherein an economy is in a state of financial turmoil, often the result of a period of negative activity based on the country’s Gross Domestic Product (GDP)
E.12. Inflation – A rise in the prices of goods and services, often equated with loss of purchasing power.
F. Financial Ratios & Accounting Terms
F.1. Net Earnings/Earnings Per Share (EPS) – Net profit of a company. EPS is the portion of a company’s profit allocated to each outstanding share of common stock, an indicator of a company’s profitability.
F.2. Revenue – What a company earns for the goods they produce, or the services they provide. It is not the same as profit.
F.3. Gross Profit – Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.
F.4. Gross Margin – Gross margin is a company’s net sales revenue minus its cost of goods sold. In other words, it is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells, and the services it provides.
F.5. Net Margin – The net profit margin is equal to how much net income or profit is generated as a percentage of revenue.
F.6. Income Statement/P&L Statement – The income statement summarises a company’s revenues and expenses over a period, either quarterly or annually.
F.7. Balance Sheet – A statement showing what a company owns, as well as the liabilities the company has and stating the outstanding shareholder equity.
F.8. Assets – An asset is an item that the company owns, with the expectation that it will yield future financial benefit. This benefit may be achieved through enhanced purchasing power (i.e., decreased expenses), revenue generation or cash receipts.
F.9. Liabilities – Liabilities are the money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds it has issued to creditors to rent, utilities and salaries.
F.10. Net Assets/NAV – Net assets is defined as the total assets of an entity, minus its total liabilities.
F.11. Equity (in Balance Sheet) – Equity is the difference between total assets and total liabilities.
F.12. NAV/share – The NAV/share is obtained by dividing the net asset value (total assets less liabilities) of a fund by the number of outstanding shares.
F.13. Tangible Assets – Tangible assets are physical and measurable assets that are used in a company’s operations. Assets like property, plant, and equipment, are tangible assets.
F.14. Goodwill – Goodwill is an intangible asset that is associated with the purchase of one company by another.
F.15. Cashflow – Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.
F.16. Free Cash Flow – Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow (FCF) is the cash left over after a company pays for its operating expenses and capital expenditures
F.17. Gearing Ratio – The gearing ratio is a financial ratio that compares some form of owner’s equity (or capital) to debt, or funds borrowed by the company. Also called the Debt/Equity ratio sometimes.
F.18. Price-Earnings Ratio (PE Ratio) – A stock’s price divided by its earnings per share, which indicates how much investors are paying for a company’s earning power.
F.19. Price-Net Asset Value or Price-Book Ratio (PNAV or PB Ratio) – The price per share of a stock divided by its book value (net worth) per share. For a stock portfolio, the ratio is the weighted average price-to-book ratio of the stocks it holds.
F.20. Dividend Yield – Annual percentage of return earned by a mutual fund/stock. The yield is determined by dividing the amount of the annual dividends per share by the current net asset value or public offering price.
F.21. Leverage – Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.
F.22. Liquidity – The ability to have ready access to invested money.
F.23. Current Ratio – The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.
F.24. Interest Coverage Ratio – The interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. The ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by the company’s interest expenses for the same period.
G. Investment Strategies
G.1. Dollar Cost Averaging – Investing the same amount of money at regular intervals over an extended period of time, regardless of the share price. By investing a fixed amount, you purchase more shares when prices are low, and fewer shares when prices are high. This may reduce your overall average cost of investing.
G.2. Compound Interest – Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest
G.3. Speculative – A speculative investment is one with a high degree of risk where the focus of the purchaser is on price fluctuations. The investor buys the tradable good (financial instrument) in an attempt to profit from market value changes.
G.4. Diversification – A diversified investment is a portfolio of various assets that earns the highest return for the least risk. A typical diversified portfolio has a mixture of stocks, fixed income, and commodities. Diversification works because these assets react differently to the same economic event.
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