Ah … financial market language. All those terms you hear finance folks toss around as if they actually meant something. Well, of course they do. Once you get clued into the lingo.
I was raised in a small town with very little exposure to any market except the supermarket. But I did love following the stock market reports in the local newspaper and pretending to invest. (Yes. I was that geeky.)
But it wasn’t until years later when I got my MBA that I learned about the “secret” language of financial market folks. And it’s served me well — even more so for my own investing than any job I ever had.
So I thought you might like a handy-dandy glossary with some of the more basic financial market terms. Feel free to ask questions or add your own!
Common financial market terms
Stock exchange
A formal marketplace, with strict rules, where stocks are bought and sold. A good deal of trading happens electronically now. But the New York Stock Exchange (NYSE) still has an actual trading floor and lots of excitement. (Remember Trading Places?)
Market indices
Averages of a group of stocks, such as the Dow Jones Industrial Average. The DJIA is made up of a “basket” of 30 well-known companies. But basket changes over the years as some fall out of favor or vanish.
There are many such indices (plural of index) all over the world. In this country we mostly hear about the Dow Jones, S&P (Standard & Poor’s), and NASDAQ. Each index has its own set of stocks. Real-time averages give a picture of how stocks are doing at a given moment.
Public companies
Some companies stay private, to keep tight controls and/or to not be subject to public scrutiny of their operations. But other companies, who want to widen the number of people who might invest, go public … meaning their stock is now traded on one of the exchanges and available for anyone to buy.
But they also must file public statements about their finances and are subject to protective federal regulations, since they are owned by their shareholders now. (Many company execs make sure they have a huge number of their own shares, so don’t feel too sorry for them.)
Market volatility
Like a roller coaster, markets go up and down, bringing different prices rather than a steady price every day. High volatility means the ups and downs of a particular financial market investment can be really big. Low volatility means the new price at any given point stays closer to the initial price.
Financial risk
Risk is about how solid the underlying value is. High-growth stocks with a lot of buzz usually have a hefty price premium built in to account for the risk. But just a whiff of bad news can bring those prices way down. That’s high financial risk. Truly low risk is a fully-insured savings account (paying almost nothing). And then there’s anything in-between.
Investment strategy
Your investment strategy is the logic / formula you use to invest. Examples: A little each month. Big spending when the market falls. Finding investments you believe in and holding long term no matter what. Using some mix of bonds and stocks to help level the volatility. Even hedging (minimizing risks by what you choose to own at the same time), which has not always been the dirty word it is now.
Dollar cost averaging – Similar to not putting all your eggs in one basket. Instead of buying all your shares of a stock or mutual fund at once, you slowly purchase the same number of shares over time, getting some at a higher and some at a lower price. This way you minimize the risk of buying all your shares at an especially high price, and then cringing on those lower days when you wish you could have bought at a better price.
Portfolio theory – Again, similar to not putting all your eggs in one basket. See also: diversification. With just one stock, if anything bad happens to that company, you’ll wind up losing a bundle. But with enough stocks (or other investments), things should balance out. A mutual fund, made of of many stocks, does that for you.
But, since many mutual funds specialize in some way, different types of funds can help balance that out. There are also index funds, a type of mutual fund based on one of the indices, such the S&P.
Other financial market terms
CDs (Certificates of deposit) – These are investments, usually offered by banks and investment firms, where you can earn a specific amount of interest on your money for a fixed amount of time. They pay very low now, but your principal is protected and, as with other bank deposit investments, you are insured up to $250,000 by the FDIC (Federal Deposit Insurance Company).
Supply and demand – A core economic principle that tells us the price of something is influenced by how easy it is to get and how in demand it is. The more in demand and the less available or limited the supply, the higher the price goes. (Like Hamilton tickets on Broadway now going for as high as $1,000 for a single ideally-located, hard-to-get seat!!)
Investment principal – Initial amount you invest, separate from any interest or dividends you earn or any drops in initial price. A savings account or CD guarantees that you will at least get all the principal, plus any yearly interest they add to your investment’s worth at regular intervals according to the terms.
IRAs and ROTH accounts – A traditional IRA (Individual Retirement Account) is an investment account designed to help people save money for retirement. It allows you to deposit money and grow that money on a tax deferred basis. That means you only pay taxes when you withdraw the funds, ideally when retired and your other taxable income is lower.
A Roth IRA is also designed for retirement savings. But a Roth requires you to pay income taxes on the money that you deposit in that tax year. And the plus side is you don’t have to pay any taxes on that money in the future when it’s finally withdrawn from your account.
More financial market tips & terms
What You Need To Know About Stocks
How Do You Make Money From Stocks?
The Day I Bought My First Stock
Diversified Investing: Stocks Go Up & Down. Where’s My Profit?
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